Full text of "MINORITY ACCESS TO CAPITAL"

See other formats

AUTHENTICATED ,
US. GOVERNMENT
INFORMATION ^

S. Hrg. 114-455

MINORITY ACCESS TO CAPITAL

FIELD HEARING

BEFORE THE

COMMITTEE ON SJ^IALL BUSINESS
AND ENTREPRENEURSHIP
UNITED STATES SENATE

ONE HUNDRED FOURTEENTH CONGRESS

FIRST SESSION

MARCH 16, 2015

Printed for the Committee on Small Business and Entrepreneurship

Available via the World Wide Web: http://www.fdsys.gov

U.S. GOVERNMENT PUBLISHING OFFICE
21-337 PDF WASHINGTON : 2016

For sale by the Superintendent of Documents, U.S. Government Publishing Office
Internet: hookstore.gpo.gov Phone: toll free (866) 512-1800; DC area (202) 512-1800
Fax: (202) 512-2104 Mail: Stop IDCC, Washington, DC 20402-0001

COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP
ONE HUNDRED FOURTEENTH CONGRESS

DAVID VITTER, Louisiana, Chairman
BENJAMIN L. CARDIN, Maryland, Ranking Member

JAMES E. RISCH, Idaho
MARCO RUBIO, Florida
RAND PAUL, Kentucky
TIM SCOTT, South Carolina
DEB FISCHER, Nebraska
CORY GARDNER, Colorado
JONI ERNST, Iowa
KELLY AYOTTE, New Hampshire
MICHAEL B. ENZI, Wyoming

MARIA CANTWELL, Washington
JEANNE SHAHEEN, New Hampshire
HEIDI HEITKAMP, North Dakota
EDWARD J. MARKEY, Massachusetts
CORY A. BOOKER, New Jersey
CHRISTOPHER A. COONS, Delaware
MAZIE K. HIRONO, Hawaii
GARY C. PETERS, Michigan

Zak Baig, Republican Staff Director
Ann Jacobs, Democratic Staff Director

(II)

CONTENTS

Opening Statements

Page

Cardin, Hon. Benjamin L., a U.S. Senator from Maryland 1

Edwards, Hon. Donna, a U.S. Representative from Maryland 89

Witnesses

Castillo, Alejandra Y., National Director, Minority Business Development

Agency (MBDA), U.S. Department of Commerce, Washington, DC 10

Doss, Antonio, District Director Washington Metropolitan Area, U.S. Small

Business Administration, Washington, DC 74

Hairston, Carl L., Administrative Vice President, M&T Bank, National Cap-
ital Business & Professional Banking Regional Manager, Washington, DC .. 79

Tucker, Stanley W., President and CEO, Meridian Management Group, Inc.,

Baltimore, MD 82

Gross-Wade, Shelly, President & CEO, ESC First, Largo, MD 89

Alphabetical Listing

Cardin, Hon. Benjamin L.

Opening statement 1

Prepared statement 6

Castillo, Alejandra Y.

Testimony 10

Report titled “Disparities in Capital Access” 11

Prepared statement 69

Doss, Antonio

Testimony 74

Prepared statement 76

Edwards, Hon. Donna

Opening statement 89

Gross-Wade, Shelly

Testimony 89

Prepared statement 92

Hairston, Carl L.

Testimony 79

Prepared statement 81

Tucker, Stanley W.

Testimony 82

Prepared statement 86

(III)

MINORITY ACCESS TO CAPITAL

MONDAY, MARCH 16, 2015

United States Senate,

Committee on Small Business

AND Entrepreneurship,

Bowie, MD.

The Committee met, pursuant to notice, at 10:04 a.m., at the Pic-
ard Center/Bowie State University Student Center-Wiseman Ball-
room, Bowie State University, Bowie, Maryland, Hon. Ben Cardin,
presiding

Present: Senator Cardin.

Also present: Representative Edwards.

OPENING STATEMENT OF HON. BENJAMIN L. CARDIN, A U.S.

SENATOR FROM MARYLAND

Senator Cardin. Good morning, everyone. Let me welcome you
all to this hearing for the Small Business and Entrepreneurship
Committee.

I, first, want to thank Bowie State University for their hospi-
tality. Dr. Brown has always been open to us.

We are very proud of the work that is done at Bowie. This is an
incredible institution that provides an extremely important func-
tion for our community, as I think President Obama has recognized
the importance of this particular campus. So we thank you for al-
lowing the hearing to take place at Bowie State University.

I want to thank Senator David Vitter, the Chair of the Com-
mittee on Small Business and Entrepreneurship, for agreeing to
allow this field hearing to take place on access for minority busi-
nesses to capital. I am the senior Democrat, the ranking Democrat,
on the Small Business Committee, and he has authorized this
hearing and for me to chair this hearing.

We will be joined by my colleague. Congresswoman Donna
Edwards. She will be here, we believe, in about 30 minutes. When
she gets here, I will recognize her and allow her to make some
opening comments and join us in this very, very important hearing.

I want to acknowledge Kevin Wheeler, who is staff of the Small
Business and Entrepreneurship Committee. I think she is around
here, right there.

Kevin has been with the Committee for a long time, and if I get
into trouble she is going to make sure I get back on track. So I ap-
preciate that very much.

I also want to introduce Ann Jacobs, who is the Democratic Staff
Director for the Small Business Committee, over there, on the cor-
ner.

( 1 )

Steven Umberger is here, who is the Maryland Director for the
Small Business Administration, and has the State of Maryland ex-
cept for the Washington suburban areas. And we have Mr. Doss
here, who represents that part of the territory for the Small Busi-
ness Administration, plus Northern Virginia and the District of Co-
lumbia.

The Small Business Committee is a committee that I wanted to
serve on.

I also would like to recognize — I know Michele is here rep-
resenting my colleague in the United States Senate, Senator Bar-
bara Mikulski. I am going to be joining Senator Mikulski in a few
minutes, in about an hour or so, in Baltimore with Vice President
Biden, but Senator Mikulski is an incredible partner on the small
business issues.

And Terrance is here representing Congressman Steny Hoyer.

So we have the full Federal delegation from Prince George’s
County. All four of us who represent will be participating in this
hearing either through staff or through, Donna Edwards, in person.
So I do appreciate all their help.

When I was elected to the United States Senate, the majority
leader asked which committees I want to serve on. And there are
obviously committees that are what we call the top-tier committees,
such as the Finance Committee and the Foreign Relations Com-
mittee, Environment and Public Works Committee, and I am proud
to serve on those committees.

But I asked the majority leader if I could serve on the Small
Business and Entrepreneurship Committee. That was one of my
top choices because I recognize that the economic engine of Amer-
ica is basically our small businesses. That is where you are going
to get job growth. That is where you are going to get innovation.
And, new ideas are going to come from small businesses.

And particularly in Maryland, I understand how important small
businesses were to our state economy.

So the majority leader recommended my appointment, and I have
been on the Small Business Committee now for eight years and am
now the lead Democrat on the Committee.

So I wanted to take a look at how we can do things that are bet-
ter, what we can do to help small business growth in our commu-
nity. We need to do a better job for small businesses.

When I was first elected, I recognized the SBA needed additional
resources. With President Obama’s elections, I supported an
amendment during the budget process that increased the funds
going to the SBA so that they could have the capacity to help.

I brought the people in from the SBA when I was first elected
and looked at the numbers as to how much aid was going, how
many loans were being made to minority businesses, and I was
pretty shocked by the low numbers. And we set out to do some-
thing about it, and we have improved those numbers.

And they are better today, but they are still not where they need
to be. When we take a look at the numbers, we see that we could
be doing a better job.

And, I had a chance to talk to Alejandra before we got on the —
before we started the formal hearing.

But this is a matter of the values of America. We believe that
everyone should have the opportunities of this country. So, there-
fore, it is a matter of our values that we make sure that those mi-
nority businesses and disadvantaged communities have the tools
necessary to achieve our values, our opportunities, in this country.

It is a matter of basic fairness, but it is also a matter of our eco-
nomic growth. If we deny a segment of our community its full po-
tential, we lose the strength in our economy.

So we must do a better job, and that is one of the reasons for
this hearing — is to take a look at how we can do a better job in
allowing those creative individuals the opportunity to have the fi-
nancing necessary to achieve their dream but at the same time to
achieve the dream of America — the strength of our economy.

So since becoming ranking member of this Committee, I, along
with other members of this Committee, have made it a top priority
to focus on removing the barriers that still affect minority-owned
small businesses. In some cases, those barriers are not unlike the
barriers which plague all businesses, but in some cases the obsta-
cles that minorities and small business owners face are very
unique.

Minority businesses represent 35 percent of the population but
only 22 percent of the businesses. This achievement gap results, in
part, from the significant obstacles that minority business owners
face in accessing capital.

If minority-owned businesses had a rate comparable to their
share of their population, that would mean 2.3 million more minor-
ity-owned firms and 11.7 million jobs. You can see the impact it
has on our economy.

Minority-owned businesses are two to three times more likely to
be denied credit, more likely to avoid applying for loans based on
the belief that they will be turned down, and more likely to receive
smaller loans and pay higher interest rates on the loans that they
do receive.

The recession hit all small businesses hard, but it hit minority-
owned small businesses especially hard, and recovery has been un-
even for different minority groups.

The Small Business Administration and the Minority Business
Development Agencies have created various programs to improve
access to capital.

I want to just, before I start with our panel — we will obviously
focus on the tools we have in government and what we can do in
government to make those tools more effective, but we also need
to look at the private sector and what we can do to make sure that
the private sector participation is open to minority businesses.

In many cases, it is a matter of just education and a matter of
outreach, but we need to do a better job because it is not just the
tools that are available in government. We have to make sure that
all the partners that are important for economic growth are sen-
sitive to the potential and fairness of our country.

Well, we have an excellent panel with us today to talk about
these issues, and I thank each of them for being here at Bowie.

I will introduce the four witnesses that are here. We are still
waiting for Shelly Gross-Wade. She indicates she will be here in
about a half an hour.

But I think we will start with our witnesses:

Alejandra Castillo, who is the National Director of the Minority
Business Development Agency. She works directly with minority
businesses, and I thank her very much for being here.

Mr. Antonio Doss, who is the District Director Washington Met-
ropolitan Area of the U.S. Small Business Administration rep-
resenting Maria Contreras-Sweet, the Administrator of the Small
Business Administration, who has been to Maryland several times
and one of the most aggressive leaders I have ever seen on small
business issues.

Mr. Doss, it is a pleasure to have you here. As I indicated earlier,
you represent the area that we are here, Bowie, and the Wash-
ington suburbs as well as Northern Virginia and the District of Co-
lumbia.

Mr. Carl Hairston, the Administrative Vice President for M&T
Bank, the National Capital Business and Professional Banking Re-
gional Manager, which is one of the preferred lenders in the SBA
programs and has been actively engaged — the bank actively en-
gaged — in loans to small businesses.

And, Mr. Stanley Tucker, who is President and CEO of Meridian
Management Group — 30 years of experience in the business field in
this area. He is a friend and an adviser and extremely active in mi-
nority business issues.

So we have an excellent panel, and Ms. Castillo, we will start
with you.

[The prepared statement of Senator Cardin follows:]

Senator Benjamin L. Cardin
Opening Statement

Senate Small Business and Entrepreneurship Committee
“Minority Access to Capital” Field Hearing
March i6, 2015

Good morning and thank you for joining us for this very
important hearing. The hearing will come to order.

Welcome to the Small Business and Entrepreneurship Committee
hearing entitled, “Minority Access to Capital.”

This hearing is being hosted by Senator Vitter, the Chair of the
Senate Committee on Small Business and Entrepreneurship.
Unfortunately, Senator Vitter was unable to be with us today, but
we appreciate his interest in the subject.

I want to thank President Mickey Burnim of Bowie State
University for allowing us to use the facility for the field hearing.

We have a distinguished panel of witnesses today, and I thank
them all for making time to be here. I also want to thank all of the
members of the public who have taken time out of their day to
join us as we hear testimony on this important issue.

Since becoming Ranking member of this Committee, I, along with
the other members of this Committee, have made it a top priority
to focus on removing the barriers that still affect minority-owned
small businesses. In some cases, those barriers are not unlike the
barriers which plague all businesses. But, in some cases, the
obstacles that minority small business owners face are very
unique.

Minorities represent 35% of the population, but only 22% of
businesses. This achievement gap results in part from the
significant obstacles that minority business owners face in
accessing capital. If minorities owned businesses at a rate

comparable to their share of the population, that would mean 2.3
million more minority-owned firms and 11.7 million more jobs.

Minority-owned businesses are two to three times more likely to
be denied credit, more likely to avoid applying for loans based on
the belief that they will be turned down and more likely to receive
smaller loans and pay higher interest rates on the loans that they
do receive.

The recession hit all small businesses hard, but it hit minority-
owned small businesses especially hard, and recovery has been
uneven for different minority groups. The Small Business
Administration and the Minority Business Development Agency
have created various programs to improve access to capital.

Joining us today is Alejandra Castillo, the National Director for
the Minority Business Development Agency for the Department of
Commerce. She is tasked with helping to create and sustain U.S.

jobs by promoting the growth and global competitiveness of
businesses owned and operated by minority entrepreneurs.

We also have Stanley Tucker, who is President and CEO of
Meridian Management Group. Meridian Management Group is a
professional asset manager for economic development and private
equity funds. He has more than 30 years of diversified business
experience, combining both lending and venture capital investing
to develop socially or economically disadvantaged small
businesses.

Additionally, we have Antonio Doss, the Small Business
Administration District Director for the Washington Metropolitan
Area. He oversees the delivery of SBA’s small business financing
products, contracting programs, and entrepreneurial coaching
services in Washington DC, Northern Virginia, and suburban
Maryland, including Bowie.

We also have Carl Hairston, the Administrative Vice President
and Regional Manager of M&T Bank’s National Capital Business
and Professional Banking Group for the District of Columbia,
Prince George’s County, Arlington, Alexandria, and McLean,
Virginia. He oversees both the lending and servicing team that
supports the branch network where he is responsible for the loan
and deposit portfolios as well as the development of new business,
and the Diversity Business Group responsible for developing
opportunities in diverse communities.

Finally, we have Shelly Gross-Wade, the President and CEO of
FSC First. FSC First is a preferred alternative lender for SBA 504
Commercial Real Estate Loans, the SBA Community Advantage
Loan Program, the State of Maryland Micro-Enterprise Loan
Program, the City of Bowie Revolving Loan Fund, and the Prince
George’s County $50 Million EDI Fund.

I would like to now turn our attention to our first witness to hear

her testimony.

STATEMENT OF ALEJANDRA Y. CASTILLO, NATIONAL DIREC-
TOR, MINORITY BUSINESS DEVELOPMENT AGENCY (MBDA),

U.S. DEPARTMENT OF COMMERCE

Ms. Castillo. Thank you very much.

Good morning, Chairman Vitter, Ranking Member Cardin, and
members of the Committee. I am Alejandra Castillo. I serve as the
National Director of the Minority Business Development Agency,
MBDA, at the U.S. Department of Commerce.

For the purpose of this hearing, I will focus on the continued
challenges minority business enterprises, or MBEs, face in access-
ing a broad array of capital during their life cycle. My testimony
highlights our research findings and underscores the actions we
have taken to create a more robust and sustainable economic eco-
system for minority businesses to grow and thrive.

MBDA is the only Federal agency tasked to help MBEs realize
their full economic potential through technical assistance, public
and private contracting opportunities, advocacy, research, edu-
cation, and strategic partnerships. This work is accomplished
through our nationwide network of 44 business centers. Each cen-
ter provides services that offer access to capital, access to contract,
and access to new markets.

Since 2009, MBDA has assisted clients in accessing nearly $26
billion in contracts and capital while creating and retaining 87,000
jobs. Celebrating 45 years of service, MBDA has been working ag-
gressively to expand the economic footprint of MBEs.

According the U.S. Census Bureau’s 2007 Survey of Business
Owners, MBEs contributed more than $1 trillion in total economic
output and employed nearly 6 million Americas. These findings
highlight the direct and significant contribution of minority firms
to the national economy.

In addition, we know that the face of America is changing. We
only need to look at the demographic changes occurring throughout
the country. By 2020, more than half of the nation’s children are
expected to be part of a minority group or ethnic ^oup. By 2043,
the minority population will be the majority group in this country.

This data translates equally in the business community, with
over 5.8 million MBEs, and growing, delivering goods and services.

It is, therefore, important to note that if the U.S. hopes to re-
main globally competitive engaging MBEs is no longer a moral or
civic imperative, it is a strategy, economic, and business impera-
tive, too.

Opportunity abounds for the development, growth, and diver-
sification of industries for MBEs. MBEs are sources of job creation
and economic development for many communities around the coun-
try. However, they continue to encounter barriers in accessing cap-
ital, contracts, and export markets.

In 2010, MBDA released a report titled “Disparities in Capital
Access.” Here are just two of the many key findings: Minority-
owned firms received lower loan amounts than non-minority-owned
firms by almost 50 percent. Minority-owned firms are three times
more likely to be denied loans than nonminority firms.

Chairman Vitter and Senator Cardin, I ask that MBDA’s “Dis-
parities in Capital Access” report be added to the written testimony
at this time.

Senator Cardin. Without objection, it will be included.
[The information follows:]

Disparities in Capital Access between
Minority and Non-Minority-Owned Businesses:

The Troubling Reality of
Capital Limitations Faced by MBEs

January 2010

Disparities in Capital Access between Minority and
Non-Minority-Owned Businesses:

The Troubling Reality of Capital Limitations
Faced by MBEs

U.S. Department of Commerce, Minority Business Development Agency

Robert W. Fairiie, Ph. D. and Alicia M. Robb, Ph.D.

January 2010

This report was developed under a contract with the U.S. Department of Commerce’s
Minority Business Development Agency, and contains information and analysis that was
reviewed and edited by officials of the Minority Business Development Agency.

David Hinson
National Director

Minority Business Development Agency

Table of Contents

Preface 1

Executive Summary 3

Introduction 7

The State of Minority Business 9

Total Gross Receipts of Minority-Ov/ned Businesses 10

Total Employment and Payroll 11

Average Firm Performance 13

Previous Research on Constraints Faced by Minority-Owned Businesses 17

Financial Capital Constraints 17

Evidence of Lending Discrimination 21

Other Types of Discrimination 22

Human Capital Barriers 22

Family Business Background and Social Capital 24

The Current Financial Crisis 27

New Empirical Analysis 31

Data Description 31

Sources of Startup and Expansion Capital 32

Capital Use among More-Established Minority Firms 35

Regression Analysis of Equity Investment and Loan Amounts 37

Decomposition Estimates 39

Capital Use among Newly-Formed Minority Firms 41

The Employment Returns to Financing 47

Conclusions 51

Bibliography 53

About the Authors

Preface

Capital access remains the most important factor llmifing the establishment, expansion and growth
of minority-owned businesses. Given this well established constraint, the current financial environment
has placed a greater burden on minority entrepreneurs who are trying to keep their businesses thriving in
today’s economy.

In this study, Dr. Robert W. Fairlie and Dr. Alicia Robb provide an in-depth review and analysis of
the barriers to capital access experienced by minority entrepreneurs, and the consequences that limited
financial sources are placing on expanding minority-owned firms.

Minority-owned businesses have been growing in number of firms, gross receipts, and paid
employment, at a faster pace than non-minority finns. If It were not for the employment growth created
by minority firms, American firms, excluding publicly-held firms, would have experienced a greater job
loss between 1997 and 2002. While paid employment grew by 4 percent among minority-owned firms, it
declined by 7 percent among non-minority firms during this period.

Minority-owned businesses continue to be the engine of employment in emerging and minority
communities. Their business growth depends on a variety of capital, from seed funding to establish new
firms, to working capita! and business loans to expand their businesses, to private equity for acquiring and
merging with other firms.

Without adequate capital minority-owned firms will fall to realize their full potential. In 2002 there were
4 million minority-owned firms, grossing $661 billion in receipts and employing 4.7 million workers. If
minority-owned firms would have reached parity with the representation of minorities in the U.S. population,
these firms would have employed over 16.1 million workers, grossed over $2.5 trillion in receipts, and
numbered 6.5 million firms. Increasing the flow of capital for minority-owned businesses must be a national
priority to re-energize the U.S. economy and increase competitiveness in the global marketplace.

David A. Hinson
National Director

Minority Business Development Agency

Executive Summary

Minority business enterprises (MBEs) make a substantial contribution to the U.S. economy, generating
$661 billion in total gross receipts in 2002. Minority-owned firms also employed 4.7 million people with
an annual payroll totaling $115 billion, The growth rates in the total number of firms, employment and
gross receipts of minority-owned businesses far outpaced non-minorlty-owned businesses between 1 997
and 2002. Had minority-owned businesses reached economic parity, the U.S. economy would have
recorded higher levels of key economic activity estimated at $2.5 trillion In gross receipts and 16.1 million
employees. As defined by the Minority Business Development Agency, economic parity is achieved when
the level of business activity of a business group is proportional to that group’s representation in the U.S.
adult population.’

Minority-owned firms are an engine of employment, with young firms creating jobs at similar rates
as young non-minority firms. Greater capital access for minority-owned firms is essential to sustain their
growth, reduce national unemployment levels, and In particular the high rate of unemployment in minority
communities.

At the very time that broad economic productivity is critical to strengthening the economic foundation
of the nation, the growth potential of minority-owned businesses is being severely hampered. Across the
nation minority-owned businesses face the obstacles of access to capital, access to markets and access to
social networks, all of which are essential for any business to increase in size and scale.

A review of national and regional studies over several decades indicates that limited financial, human,
and social capital as well as racial discrimination are primarily responsible for the disparities in minority
business performance. Inadequate access to financial capital continues to be a particularly important
constraint limiting the growth of minority-owned businesses. The latest nationally representative data on
the financing of minority firms indicates large disparities in access to financial capital. Minority-owned
businesses are found to pay higher interest rates on loans. They are also more likely to be denied credit,
and are less likely to apply for loans because they fear their applications will be denied. Further, minority-
owned firms are found to have less than half the average amount of recent equity investments and loans
than non-minority firms even among firms with $500,000 or more in annual gross receipts, and also Invest
substantially less capital at startup and in the first few years of existence than non-minority firms.

The current economic crisis is posing severe challenges for minority businesses to meet their potential
of creating 16.1 million jobs and generating $2.5 trillion in annual gross receipts. Existing obstacles to
greater minority business success challenge the realization of the American Dream of ownership and
wealth creation. Unless immediate action is taken, minority communities will continue to lag behind their
non-minority counterparts undermining the ability of the nation to quickly regain its economic footing.

' U.S, Dcparlment of Commerce, Minority Busines-i Development Agaicy, The Slate of Minority Business Enterprises, An Overview of the 2002
Survey of Business Owners. Number of Firms. Gross Receipts, and Paid Employees (2006).

Key Findings

Job Creation

• Young Minority-Owned Firms Create Jobs at Similar Rates as Young Non-Minority Firms -
Young minority firms created jobs at similar rates as young non-minority firms over the first four
years of operations. Betv/een 2004 and 2007, young minority firms created 3.1 jobs while young
non-minority firms created 2.4 jobs during the same period according to an analysis of the
Kauffman Foundation Survey.

• Minority Businesses Create Jobs with Good Pay - The average payroll per employee was
not substantially higher among non-minority employer firms compared to that of minority-owned
firms. In 2002, payroll per employee was $29,842 for non-minority employer firms compared to
about $26,000 for minority-owned fimns, according to data from the U.S. Census Bureau.
Minority-owned firms are employing workers at similar wages as non-minority firms, and are the
backbone of many minority communities across the nation.

• 2001 U.S. Recession Benefited from Minority Business Job Creation - Between 1997 and
2002, total employment declined by 7 percent among non-minority firms, however total
employment increased among minority firms during the same period. Total employment grew by
11 percent among Hispanic owned firms, by 5 percent among African American owned firms,
and by 2 percent among Asian firms. For all minority firms employment increased by 4 percent
during the same period. If not for employment growrth among minority-owned firms over this
period the loss in total employment would have been even larger: an additional 160,000 jobs
would have been lost.

Fsster Growth

Mlnority-Ovwed Firms Outpace Growth of Non-Minority Firms • Between 1997 and 2002,
minority-owned firms far outpaced non-minority firms in terms of growth in number of businesses
total gross receipts, number of employees, and total annual payroll. Minority firms grew in
number of firms by 30 percent and In gross receipts by 1 2 percent, compared with an increase
of 6 percent in number of firms and 4 percent in gross receipts for non-minority firms. Total
employment grew by 4 percent and annual payroll by 21 percent for minority-owned firms
compared to a decline of 7 percent in total employment and an increase in annual payroll of 8
percent for non-minority firms during the same period.

Minority-Owned Firms Lag Behind in Size Compared with Non-Minority Firms - Although
minority-owned firms outpaced the growth of non-minority firms in several business measures,
minority-owned firms are smaller on average than non-minority firms in size of gross receipts,
employment, and payrolls. In 2002, average gross receipts of minority-owned firms were about
$167,000 compared to $439,000 for non-minority firms. Average employment size of minority
employer firms was 7.4 employees compared to 11.2 employees for non-minority employer firms
in 2002. Average payroll of minority employer firms was about $200,000 compared to $333,000
for non-minority employer firms.

Capital Access Disparities
Loans

* Minority*Owned Firms Are Less Likely To Receive Loans than Non-Minority Firms - Among
firms with gross receipts under $500,000, 23 percent of non-minority firms received loans
compared to 17 percent of minority firms. Among high sales firms (firms with annual gross
receipts of $500,000 or more), 52 percent of non^inority firms received loans compared with 41
percent of minority firms according to 2003 data from the Survey of Small Business Finances.

• Minority-Owned Firms Receive Lower Loan Amounts than Non-Minority Firms - The
average loan amount for ail high sales minority firms was $149,000. The non-minority average
was more than twice this amount at $310,000. Conditioning on the percentage of firms
receiving loans, the average loan received by high sales minority firms was $363,000 compared
with $592,000 for non-minority firms.

« Minority-Owned Firms Are More Likely To Be Denied Loans - Among finns with gross re-
ceipts under $500,000, loan denial rates for minority firms were about three times higher, at 42
percent, compared to those of non-minority-owned firms. 16 percent. For high sales firms, the
rate of loan denial was almost twice as high for minority firms as for non-minority firms.

* Minority-Owned Firms Are More Likely To Not Apply for Loans Due to Rejection Fears -

Among firms with gross receipts under $500,000, 33 percent of minority firms did not apply for
loans because of fear of rejection compared to 17 percent of non-minority firms. For high sales
firms, 19 percent of minority firms did not apply for loans because of a fear of rejection
compared to 12 percent of non-minority firms.

• Minority-Owned Firms Pay Higher Interest Rates on Business Loans - For all firms,
minority firms paid 7.8 percent on average for loans compared with 6.4 percent for non-minority
finns. The difference was smaller, but still existed between minority and non-minority high sales
firms.

Minority-Owned Firms Receive Smaller Equity Investments than Non-Minority Firms - The
average amount of new equity investments was $3,379 for minority firms, which is 43 percent of
the non-minority level. The average amount of new equity investments was $7,274 for minority
firms with high sales, which was only 38 percent of the non-minority level according to 2003 data
from the Survey of Small Business Finances.

Venture Capital Funds Focused on Minority-Owned Firm Investments Are Competitive -
Venture capital funds focused on investing in minority-owned firms provide returns that are
comparable to mainstream venture capital firms. Funds investing in minority businesses may
provide attractive returns because the market is underserved.

Financial Investment

• Minority-Owned Firms Have Lower Loan and Equity Investments - Investment disparities
between minority and non-minority firms were larger for external debt (bank loans, credit cards)
and especially externa! equity, compared to the disparity in personal or family loan investments.
Minority firms averaged $29,879 in external debt compared with $36,777 for non-minority firms.
Minority firms had the most trouble obtaining external equity with $2,984 on average compared
with $7,607 on average for non-minority firms.

• Disparities in Access to Financial Capital Grow after First Year of Operations - Non-minority
businesses invested an average of $45,000 annually Into their firms, while minority-owned firms
invested less than $30,000 on average after the first year of operation. The disparity in financial
capital between minority and non-minority firms was much larger In percentage terms for the
next three years in operation than their first year.

• Lowrer Wealth Levels Are A Barrier to Entry for Minority Entrepreneurs - Estimates from
the U.S. Census Bureau indicate that half of all Hispanic families have less than $7,950 in
wealth, and half of all African American families less than $5,446. Wealth levels among whites
are 11 to 16 times higher. Low levels of wealth and liquidity constraints create a substantial
barrier to entry for minority entrepreneurs because the owner’s wealth can be invested directly
in the business, used as collateral to obtain business loans or used to acquire other businesses.

• Experience, Geographic Locatior), Lower Sales and Industry Sectors Partially Limit Capital
Access for Minority Firms - Minority-owned businesses had less business experience, lower
sales, and less favorable geographical and industry distributions, all of which partially limited
their ability to raise ^nancial capital.

Introduction

Minority businesses enterprises (MBEs) contribute substantially to the U.S. economy. Businesses
owned by minorities produced $661 billion in gross receipts In 2002, and their growth rate in total gross
receipts far outpaced the growth rate for non-minority-owned businesses between 1997 and 2002.^ In
2002, minority firms employed a workforce of 4.7 million people with an annual payroll of $11 5 billion.

These jobs are located across the nation, many In emerging communities and employing a large proportion
of minorities.^ Another contribution that is often overtooked, however, is that minority business owners
create an additional four million jobs for themselves.

Although minority-owned businesses contribute greatly to the macro-economy and many are
extremely successful, there remains a sizeable untapped potential among this group of finns. If minority-
owned firms would have reached economic parity in 2002, these firms would have employed over
16.1 million workers and grossed over $2.5 trillion in receipts.'* As defined by the Minority Business
Development Agency, economic parity is achieved when the level of business activity of a business group is
proportional to that group’s representation in the U.S. adult population.®

Minority-owned firms are smaller on average than non-minority-owned firms with lower gross receipts,
survival rates, employment, and payrolls.® The disparities are extremely large; for example, Hispanic-
owned firms have an average annual gross receipts level that is one-third the non-minority level, and
African American owned firms have an average annual gross receipts level that is one-sixth the non-
minority level. A growing number of studies indicate that limited financial, human and social capital, as well
as racial discrimination are responsible for these disparities in business performance.^ Inadequate access
to financial capital is found to be a particularly important constraint limiting the growth of minority-owned
businesses.

Given the current financial crisis, the credit markets have lightened and access to capital has being
further restricted for MBEs. Moreover, the rapid decline in the housing, stock and labor markets in the past
several months has taken a toll on an entrepreneur’s personal and family wealth. This wealth is important
because is frequently the primary source of capital entrepreneurs have for investing in their businesses.
Likewise, the potential to receive outside equity funding from venture capitalists and angel investors has
also dropped considerably in recent months. For example, the total amount invested by venture capitalists
plummeted from $5.7 billion for 866 deals in the fourth quarter of 2007 to only $3.0 billion for 549 deals in
the fourth quarter of 2008.®

^ Robert Fairiie and Alicia Robb, Race and Entrepreneurial Success: Black-. Asian-, and IVhiie-Owned Busines.'tes in the United Stales
(Cambridge: MIT Press, 2008) U.S, Depaitmeni of Commerce, Minority Business Development Agency, The State of Minority Business (fact
sheet), 2008 (accessed July 2009), available from http:/Avww.mbda.gov/index.php?scctionJd=6&bucket_id=789#bucket_852.

’Thomas D, Bo.ston, The ING Gazelle Index. Third Quarter. (accessed July 2009): available from wvr'vv iiiggazelleindex.coin, Thomas
D. Boston, “The Role of Black-Owned Businesses in Black Community Development,” in Jobs and Economic Development in Minority
Communities: Realities, Challenges, and Innovation, eds. Paul Ong and Anastasia Loukaitou-Sideris (Philadelphia: Temple University Press, 2006),
U.S. Census Bureau, 1992 Economic Census: Characteristics of Business Owners I'^ashing.lon, D.C,: U.S, Government Printing Office, 1997)

■' U.S. Department of Commerce, Minority Business Development Agency. The Stale of Minority Business Enterprises. An Ovemew of the 2002
Survey of Business Owners, Number of Finns. Gross Receipts, and Paid Employees.

^ ibid. Note: In 2002, minorities represented 29 percent of the U.S. adult population

'TJ.S. Census Bureau, \ 992 Economic Census: Characteristics of Business O^vners (1997). U.S. Census Bureau, 2002 Economic Census. Survey
of Business Owners (Washington, DC.: US Government Printing Office. 2006),

’ U.S. Departmeni of Commerce, Economics and Statistic.^ Administndion and the Minority Business Development Agency, ^evj to Minority
Emrepreneurial Success: Capitol. Educaiion and Technology, Patricia Buckley (2002). David G. Blanchllower, P, Levine, and D. Zimmerman.
“Discrimination m the Small Bu.siness Credit Market,” Review of Economics Statistics 85, no. 4 (2003): 930-943. Ken Cavaliuzzo, Linda
Cavalluzzo, and John Wolken. "Competition, Small Business Finatcing, aid Discrimination: Evidence from a New Survey," Journal of Business
75. no. 4 (2002): 641-679. Fairiie and Robb. Race and Entrepreneurial Success: Black-, Asian-, and White-Owned Businesses m the United States.
* I’ricewaterhouseCoopers and the National Venture Capit^ Associalicm, MoneyTree'^ Report, 2009 (accessed October 2009); available from
http;//www.pwcmoneytrec.com.

Banks and other lending institutions have also severely tightened lending standards and increased
loan costs to small, medium and large businesses. In its annual survey of senior loan officers, the Federal
Reserve found that 65 percent of domestic banks have "tightened lending standards on commercial
and industrial loans to large and middle-market flitns,” and 70 percent of these banks tightened lending
standards to small firms. In addition, “large fractions of banks reported having increased the costs of
credit lines to firms of all size.”® Banks are reluctant to lend to minority-ovirned firms and other businesses
in the current economic recession because of concerns about the ability to repay loans. Additionally, the
decline in the personal wealth of entrepreneurs has limited their ability to use this wealth as collateral or
personal guarantees for loans. The secondary market for toans has dried up, and many banks, especially
community banks, are struggling to have enough deposits to meet the demand for loans.

Diminishing credit access and higher borrowing costs will disproportionately impact the creation and
growth of minority businesses across America. The recent unprecedented decline in the financial market
combined with a severe drop in demand for goods and services resulting from the current economic
recession may lead to many minority business failures. Anecdotally, business trade organizations and the
Minority Business Enterprise Centers funded by the Minority Business Development Agency have reported
that credit lines of viable minority-owned businesses have been closed down by their lending institutions.

As a result of the existing financial constraints, the tremendous growth in number of firms, gross receipts
and employment enjoyed by minority firms during the past decades could be halted with large negative
consequences for the entire U.S. economy.

It is an important policy concern to ensure and ultimately improve the performance of MBEs in the
United States. Business owners represent roughly 10 percent of the workforce, but hold nearly 40 percent
of the total U.S. wealth.’® Strong minority business growth directly impacts the reduction of inequality in
earnings and wealth between minorities and non-minorities.”

Another concern is the loss in economic efficiency resulting from blocked opportunities for
minorities to start, acquire and grow businesses. Among these barriers to business formation are
liquidity constraints and unfair lending practices that result from structural inequalities or racial
discrimination. Barriers to entry and expansion faced by MBEs are very costly to U.S. productivity,
especially as minorities represent an increasing share of the total population. Additionally, by limiting
the business success to only a few groups and not the broad range of diverse groups that comprise
the United States we are constraining innovative ideas for new products and services, and access to
global markets where many minority entrepreneurs have a competitive advantage based on cultural
knowledge, social and familial ties, and language capabilities.’^

In addition, barriers to business growth may be especially damaging for job creation in emerging
communities.’® Minority firms in the United States employed nearly 4.7 million paid workers in 2002,’^ a
disproportionate share of them minorities and many of these jobs are located in minority and emerging
communities. V\fithout the continuing success and expansion of minority businesses the benefits of economic
growtfi will be unevenly divided across the population.

^ Board of Governors of the Federal Reserve System, Thi’ January 2009 Senior Loan Officer Opinion Survey on Bank Lending Practices. 2009
(accessed July 2009); available from htlp://www.federalrescrve.gov/boarddocs/SnLoanSurvey/200902/default.ht!Ti.

Board of Governors of the Federal Reserve System, “Recent Changes in U.S. Family Finances: Evidence from the 2001 and 2004 Survey
of Consiuner Finances," Federal Re.serve Bulletin, Brian K. Bucks. Arthur B. Kennickell, and Kevin B. Moore, 2006 (accessed October 2009);
available from hltp://federalreserve.gov/pubs/oss/O5s2/2004/bull0206.pdf-

" William D. Bradford, “The Wealth Dynamics ofEntrefHenanstup for Blads and White Families in the U.S.," Revteyv of Income and Wealth 49 (2003): 89-116.

John Owens and Robert Pazornik, Minority Business Enterprises in the Global Economy: The Business Case. Prepared in collaboration with the
Minority Business Development Agency (Washingttm D.C.; Minority Business Develt^ment Agency, 2003).

Thomas D. Boston, “Generating Jobs through African AmerictUi Business Development,” Readings in Black Political Economy, eds. J.
Whitehead and C. Harris (Dubuque: Kendall-Hunt, 1999). Boston, “The Role of Biack-Owned Businesses in Black Community Development.”
'■* U.S. Census Bureau, 1992 EconomicCensus: Characteristics Basinet Owners. U.S. Census Bureau. 2002 Economic Census: Survey of Business Owners.

The State of Minority Business

To gain some perspective on the state of minority business in the United States we briefly discuss
current business ownership and performance patterns. We first discuss estimates of minority business
ownership created from microdata from the 2008 Current Population Survey (CPS). This survey is
conducted by the U.S. Bureau of Labor Statistics and Census Bureau and contains the iatest avaiiabie
nationai data on business ownership in the United States. Tabie 1 reports the business ownership rate,
which is the ratio of the number of business owners to the total workforce. The CPS captures individuals
who own all types of businesses including incorporated, unincorporated, employer and non-employer
businesses although owners of side- and low-hours businesses are excluded.'*

Table 1

Business Ownership Rates by Race/Ethnicity
Current Population Survey (2008)

Business Ownership
Percent of

Workforce Sample Size

Total

10,1%

692,609

Non-Minority

11.3%

506,160

Native-American

7.6%

6,570

Asian/Pacilic Islander

10.3%

33,700

Hispanic

7.9%

74,037

African-American

5.5%

61,957

Notes: (1) The sample consists of individuals ages 20-64 who
work 15 or more hours per usual week. (2) Business ownership
status is based on the worker's main job activity and includes
owners of both unincorporated and incorporated businesses. (3)
All estimates are calculated using sample weights provided by
the Current Population Survey.

In the United States, 10.1 percent of the total workforce owns a business. Business ownership rates,
however, differ substantially by race and ethnicity. Despite the growth in the number of minority firms
between 1997 and 2002, minority business ownership rates as a percentage of the minority workforce
lagged behind those of non-minorities. Business ownership rates are the highest for non-minorities (i.e.
non-Hispanic whites) at 11.3 percent. Asians have the next highest rate at 10.3 percent, which is similar to
findings in previous studies.'* There are differences across Asian groups, however, with some groups such
as immigrants from the Philippines having very low rates of business ownership.

OvLTiers of side- and small-scale businesses are excluded because business ownership status is defined for the main job activity and only
workers with at least i 5 hours worked in the survey week arc included in the sample. Published estimates I'rom the CPS only include
unincorporated business owners and do not restrict the number of hours wOTked.

Kwang Kim, Won Hurh, and Maiyilyn Fernandez. “Intragroup Differences in Business Participation: Three Asian Immigrant Groups,”
International Migration Review 23. no, I (1989), Don Mar, “Individual Oiaracteristics vs. Cily Stnictural Characteristics: Explaining Self-
Employment Differences among Chinese, Japanese, and Filipinos in the United States,” Journo/ of Socio-Economics 34. no,3 (2005). Robert W,
Fairlie, Estimating the Contribution of Immigrant Business Owners to the U.S. Economy, Final Report /or U.S. Small Business Acfininislralion, (2008).

Business ownership rates are lower among Native Americans, HIspanics and African Americans. The
rate of business ownership among Native Americans Is 7.6 percent, among Hispanics is 7.9 percent, and
the African American business ownership rate is even lower at 5.5 percent.

Overall, minority business ownership is low relative to the size of the minority workforce. An analysis
of trends over the past few decades does not reveal major changes in business ownership rates among
minority groups.’^ The barriers to business formation responsible for these patterns are discussed in
the next section. Existing barriers to business formation among minorities limit the nation’s potential for
economic growth and productivity.

Total Gross Receipts of Minority*Owned Businesses

Over the past two decades, growth in the total number of minority-owned firms and their annual
gross receipts far outpaced the growth rate for non-minority-owned firms. Table 2 reports estimates of
the number of businesses and total gross receipts by ethnic and racial group over the past two decades.’®
The statistics are from the most widely used and highly respected sources of data on minority-owned
businesses — the Survey of Minority-Owned Business Enterprises (SMOBE) and the Survey of Business
Owners (SBO), which are surveys conducted by the U.S. Census Bureau. Estimates are derived for non-
minority-owned firms as outlined below.

Table 2

Sales and Receipts by Ethnicity and Race

Survey of Minority-Owned Buaness Enterprises (1982-1997) and Survey of Business Owners (2002)

Includes

C-Cofos

All Firms

Non-Minority
Owned Firms

Black-Owned

Firms

Hispanic-
Owned Firms

Asian and P.I.-
Owned Firms

Native Amer./
Nat. Alaskan

Total number of

1982

12.059.950

11.318,310

308.260

233,975

187,691

13,573

1987

13,695.480

12,481.730

424.165

422,373

355,331

21,380

1992

17,253.143

15.287,578

620,912

862,605

603,426

102,271

1997

18.278.933

15,492.835

780,770

1,121,433

785,480

187,921

1997

Yes

20.440.415

17.316.796

823,499

1.199,896

912,960

197,300

2002

Yes

22,480.256

18.326,375

1.197,567

1,573,464

1,132,535

201,387

Total sales and

1982

$967,450,721

$932,996,721

$9,619,055

$11,759,133

$12,653,315

$495,000

receipts ($1,000)

1987

$1,994,808,000

$1,916,968,057

$19,762,876

$24,731,600

$33,124,326

$911,279

1992

$3,324,200,000

$3,122,188,579

$32,197,361

$76,842,000

$95,713,613

$8,057,003

1997

$4,239,708,305

$3,904,392,106

$42,670,785

$114,430,852

$161,141,634

$22,441,413

1997

Yes

$8,392,001,261

$7,763,010,611

$71,214,662

$186,274,581

$306,932,982

$34,343,907

2002

Yes

$8,783,541,146

$8,055,884,659

$88,641,608

$221,927,425

$330,943,036

$26,872,947

Mean sales and

1982

$80,220

$82,433

$31,204

$50,258

$67,416

$36,469

receipts

1987

$145,654

$153,582

$46,592

$58,554

$93,221

$42,623

1992

$192,672

$204,230

$51,855

$89,081

$158,617

$78,781

1997

$231,945

$252,013

$54,652

$102,040

$205,151

$119,419

1997

Yes

$410,559

$448,294

$86,478

$155,242

$336,195

$174,069

2002

Yes

$390,722

$439,579

$74,018

$141 044

$292,214

$133,439

Sources; U.S, Census Bureau, Eaxiomic Census. Survey of Minority-Owned Business Enterprises (1982, 1967. 1992, 1997), U.S. Census

Bureau, Survey of Business Owners (2002), and special tabulations prepared by the U.S. Census Bureau. Notes: (1) All firms excludes
publicly held, foreign-owned, not for profit and other firms, which are not included in the estimates by race. (2) Estimates are not directly
comparable overfime. (3) The non-minority category is equal to all firms minus all minwity firms for 1982, 1987 and 1992, and all white films
minus Latino-owned firms in 2002. (4) The most recenfly revised estimates are reported when applicable. (5) Native AmericanfNative
Alaskan estimates for 2002 do not include American lixiian tribal entities making them not directiy comparable to 1 997.

See Fairhe and Robb. Race and Entrepreneurial Success: Black-. Asian-, and H'hite-Ownsd Businesses in the United States, for more
discussion on recent trends in business outcomes by race and ethnicity.

The tables reported here repre.sent a new compilation of data of recent trends in business outcomes by race. The data reported here are
taken from government publications and specif tabulations prepared for us by U.S. Census Bureau staff (see Fairlie and Robb, Race and
Entrepreneurial Succe.ss: Black-, Asian-, and While-Owned Businesses in the United States for more details). These data, however, experienced
several changes in sample criteria and defithtions making them not directly comparable over time. Estimates were also revised in many cases by
the Cen.sus Bureau, and we attempted to find the most recently avatItMe d^. The 2002 Survey of Business Owners (SBO) contains the most
recent data. Preliminary data for the 2007 SBO will be published by the Cfflisus in 2010.

Data from the SMOBE and SBO indicate that the number of minority businesses grew rapidly
over the past two decades. The growth rates and increases In the number of Asian- and Hispanic-
owned businesses are large. Asian-owned businesses grew from 187,691 to more than 1 .1 million in
2002, and Hispanic-owned businesses grew from 233,975 in 1982 to 1 .6 million in 2002. Likewise,

African American-owned businesses grew from 308,260 in 1 982 to nearly 1 .2 million in 2002. The total
number of businesses and the number of non-minority-owned businesses also grew substantially over
the period, but at much slower rates. For example, the total number of businesses in the United States
grew by 86 percent from 1 982 to 2002. On the other hand, growth rates for Asian and Hispanic business
were the highest at 503 percent and 572 percent, respectively. The growth rate for African American-
owned businesses was also high at 288 percent during the same period. One major factor spurring the
rapid growth rates in the number of minority businesses is population growth, especially for Asians and
Hispanics. In addition, growth rates are partly due to changes In the sample universe of businesses
included in the SMOBE and SBO surveys. Because of sample changes, growth rates for total minority-
owned firms may not be comparable over the past two decades.

If we focus on the most recent period available, 1 997 to 2002, statistics for the total number
of businesses including C corporations indicate rapid growrth rates in the number of minority-owned
businesses. Minority-owned firms grew In number of firms by 30 percent, from 3 million to 4 million
firms during that period.^® The number of Aslan and Hispanic businesses grew by 24.1 percent and 31.1
percent, respectively. The number of African American-owned businesses grew faster, by 45.4 percent,
from 1997 to 2002. In contrast, the number of non-minority businesses grew by 5.8 percent from 1997 to
2002. Although data from the CPS indicate slower rates of grov/th in the number of business owners, these
data confirm the finding that the number of minority businesses increased much faster than the number of
non-minority businesses over the past two decades.®’

Total gross receipts for all minority-owned firms were nearly $700 billion in 2002. Native American
owned firms grossed $27 billion in receipts. Asian-owned firms had the largest contribution among
minority-owned firms at $331 billion. Hispanic-owned firms grossed $222 billion in receipts, and African
American-owned firms had total gross receipts of nearly $90 billion.

Total gross receipts grew much faster for minority-owned firms than for non-minority-owned firms,
by 12 percent from $591 billion to $661 billion.^’ The growth rate in total gross receipts for Asian-owned
firms was 8 percent, and for Hispanic-owned firms 19 percent. African American-owned firms experienced
the fastest growth rate in total sales at 24 percent from 1997 to 2002. In contrast to these high growth
rates, total gross receipts grew by only 4 percent from 1997 to 2002 for non-minority firms. It is difficult to
estimate growth rates for Native American firms because the 2002 data excluded Native American tribal
entities more effectively than in 1997 and are therefore not comparable.

Total Employment and Payroll

Minority-owned firms also contribute substantially to greater employment in the U.S. economy.
Minority-owned firms employed 4.7 million workers with a total annual payroll of $115 billion in 2002.

Among specific groups, Native American firms employed neaiiy 200,000 paid workers, Asian firms 2.2
million paid workers, Hispanic firms more than 1 .5 million paid workers, and African American firms over
750,000 paid workers. Table 3 includes the data.

U.S Department of Commerce, Minority Busine.'ss Development Agency, The Stale of Minority Businesses.

Fairlie and Robb. Race and Entrepreneurial Success: Black-, Asian-, and White-Owned Businesses in the United States.

’’ U.S Department of Commerce, Minority Business Development Agency, The Slate of Minority Businesses.

Tables

Emf^oyment Statisflcs by and Race

Survey of Minority-Owned Business Ente^rises (1982-1997) SHid Survey of Business Owners (2002)

Includes

C-Corps

All Firms

Non-Minority
Owned Firms

Black-Owned

Finns

Hispanic-
Owned Firms

Asian & P.J.-
Owned Firms

Native Amer,/
Nat. Alaskan

Total number of firms

1982

12.059.950

11.318.310

308,260

233,975

187,691

13,573

1987

13,695.480

12.481.730

424.165

422,373

355,331

21,380

1992

17,253,143

15,287.578

620.912

862,605

603,426

102,271

1997

18,278,933

15.492.835

780,770

1,121,433

785,480

187,921

1997

Yes

20,440,415

17.316.7^

823.499

1.199,896

912,960

197,300

2002

Yes

22.480.256

18.326,375

1.197.567

1,573.464

1,132,535

201,387

Total number of

1982

N/A

121.373

154,791

N/A

employees

1987

19,853,333

19,016,850

220.467

264.846

351,345

8,956

1992

27,403,974

25,531,104

345.193

691.056

N/A

1997

29,703.946

27,122,185

378.346

838,738

1,224,733

202,535

1997

Yes

58.901.412

54,084,357

718.341

1,388,746

2,203,079

298,661

2002

Yes

55,368,216

50.429.209

753.978

1,536,795

2,243,267

191,270

Mean number of paid

1982

N/A

0.4

0.7

N/A

employees

1987

1.4

1.5

0.5

0.6

1.0

0.4

1992

1.6

1.7

0.6

0.8

N/A

1997

1.6

1.8

0.5

0.7

1.6

1,1

1997

Yes

2.9

3.1

0.9

1.2

2.4

1.5

2002

Yes

2.5

2.8

0.6

1.0

2.0

0.9

Sources: U.S. Census Bureau, Economic Census, Survey of Mhiority-Owned Business Enterprises (1982, 1987, 1992, 1997), U.S. Census

Bureau. Survey of Business Owners (2002), and special tabulations prepared by Oie U.S. Census Bureau. Notes: (1 ) All firms excludes
publicly held, foreign-owned, not for profit and other firms, v^ich are not included in Oie estimates by race. (2) Estimates are not directly
comparable over Ume. (3) The non-minority category is equal to all firms minus al minority firms for 1982, 1987 and 1992, and all white firms
minus Latino-owned firms in 2002. (4) The most recently revised estimates are reported when applicable. (5) Native American^ative
Alaskan estimates for 2002 do not include American Indian tribal entities making them not directly comparable to 1 997.

Even more striking from the results reported In Table 3, however, are the relative patterns of
employment growth. Total employment grew by 11 percent among Hispanic owned firms from 1997 to
2002, and by 5 percent among African American owned firms. For all minority-owned firms, employment
increased by 4 percent between 1997 and 2002.^2 In contrast, total employment actually declined by 7
percent among non-minority firms from 1997 to 2002. If not for employment growth among minority-owned
firms over this period the toss in total employment would have been even larger: an additional 160,000 jobs
would have been /osf.”

Minority-owned firms make major contributions to the total payroll of firms in the United States {see
Table 4). Native American firms paid their employees a total of $5 billion in wages and salaries in 2002,
Asian-owned firms paid their employees a total of $57 billion. Hispanic-owned firms had a total
annual payroll of $37 billion, and African American-owned firms paid their employees a total of $18 billion.
Total payrolls have been growing much faster among minority-owned firms than among non-minority
firms. Asian-, Hispanic- and African American-owned businesses combined experienced an increase in
total payroll of 23 percent from 1 997 to 2002. The rate of growth in the total payroll among non-minority
businesses was 8 percent.

^ U.S. Department of Commerce, Minority Business Development Agency, Characteristics of Minorily Bitsimsses and Etjtrepreneurs (200$).
Jbid.

TsbfeA

Employment Statisttes by Ethnidty and Race for Emf^oyer Firms Only
Survey of Minority-Owned Business Enterprises (1992-1997) and Survey of Business Owners (2002)

Includes

C-Coros

Afl Firms

N(Ki-Mnority
Owr>ed Firms

Bted(-0«med

FHms

Hispanic-
Owned Firms

Asian & P.I.-
Ovmed Firms

Native Amer./
Nat. Alaskan

Total number of emptoyer

1982

N/A

NIA

37,841

39,272

N/A

1987

3,487,454

3,239,305

70.815

82,908

92,718

3.739

1992

3,134.959

2,823.264

64,478

115,364

N/A

1997

3,277,510

2.860.580

63,010

151,571

185,357

26,075

1997

Yes

5,027,208

4,372.817

93.235

211,884

289,999

33,277

2002

Yes

5,172,064

4.512.577

94,518

198,542

323.161

24,498

Total annual payroll for

1982

N/A

$948

$1,240

N/A

employer firms

1987

$299,176

$289,^7

$2,761

$3,243

$3,502

$109

($1,000,000)

1992

$523,574

$495,037

$4,807

$10,768

N/A

1997

$675,452

$628,500

$6,532

$15,391

$21,620

$4,108

1997

Yes

$1,499,298

$1,395,150

$14,322

$29,830

$46,180

$6,624

2002

Yes

$1,626,785

$1,504,917

$17,550

$36,712

$56,871

$5,135

Mean annual payroll for

1982

N/A

$25,055

$31,573

N/A

employer firms

1987

$85,786

$89,423

$38,990

$39,120

$37,770

$29,225

1992

$167,011

$175,342

$74,547

$93,340

N/A

1997

$206,087

$219,711

$103,673

$101,540

$116,642

$157,543

1997

Yes

$298,237

$319,061

$153,615

$140,785

$159,240

$199,063

2002

Yes

$314,533

$333,494

$185,680

$183,980

$175,984

$209,620

Payroll per employee for

1982

N/A

$7,812

$8,010

N/A

employer firms

1987

$15,069

$15,232

$12,524

$12,246

1992

$19,106

$19,390

$13,924

315,582

N/A

1997

$22,739

$23,173

$17,266

$18,350

$17,653

$20,283

1997

Yes

$25,454

$25,796

$19,938

$21,480

$20,961

$22,180

2002

Yes

$29,381

$29,842

$23277

$23,888

$25 352

$26,848

Sources: U.S. Census Bureau, Economic Census, Survey of Mirrority-Ovmed Busirtess Enterprises (1982, 1987, 1992, 1997), U.S. Census
Bureau, Survey of Business Owners (2002). and special tabulations prepared by the U,S, Census Bureau, Notes: (1) All firms excludes
puWicly held, foreign-owned, not for profit and other firms, which are not included in the estimates by race. (2) Estimates are not directly
comparable overtime. (3) The non-minority category is equal to all firms minus all minority firms for 1982, 1967 and 1992, and ali white firms
minus Uatino-owned firms in 2002. (4) The most recwilly revised estimates are repotted when applicable, (5) Native American/Native Alaskan
estimates for 2002 do not include American Indian tribal enfities making them not directly comparable to 1997.

Minority-owned firms clearly make an important contribution to the U.S. economy as measured
by total gross receipts, employment and total payroll. As discussed before, MBEs had total annual
gross receipts of $661 billion, employed 4.7 million workers and paid them $115 billion In wages and
salaries In 2002. More importantly, however, minority-owned firms have far outpaced non-minority
firms in terms of growth rates in the number of businesses, total gross receipts, number of employees,
and total annual payroll. In short, minority businesses continue to be a substantial part of the U.S.
business force with the ability to do more.

Average Firm Performance

Minority-owned businesses contribute greatly to the U.S. economy, but there is sizeable untapped
potential among these firms. Although the growth in number of firms, gross receipts and employees of
minority firms far outpaces that of non-minority firms, minority-owned firms are smaller on average than
non-minority-owned firms in size of gross receipts, employment, and payrolls. Tables 2-4 report estimates
of average gross receipts, employment and payroll, respectively. We now briefly discuss these patterns.

Minority-owned firms have lower average gross receipts per firm than non-minority-owned firms.

In 2002, average gross receipts for minority-owned firms were about $167,000 per firm, compared to
$439,000 for non-minority firms. Native American firms had average gross receipts of $133,439, about 30
percent of the average receipts of non-minority firms. Asian-owned firms also had lower average gross

Fairlie and Robb, Race and Entrepreneurial Success: Black-, Asian-, and White-Owned Businesses in (he United Slates.

receipts than non-minority firms, but the difference is much smaller. Average annual gross receipts were
$292,214 for Asian-owned businesses. But, for some groups included in the Asian category, average sales
were much lower. Filipino-owned firms had average receipts of $113,110, Vietnamese-owned firms had
average receipts of $105,501 , and Native Hawaiian and Pacific Islander owned firms had average receipts
of $147,837.^^

Hispanic firms also had lower average gross receipts than non-minority firms. Average gross receipts
of Hispanic firms were $141 .044 in 2002.^ Finally, African American-owned firms had the lowest average
gross receipts among all reported groups at $74,018 per firm. These ethnic and racial disparities have
also existed throughout the past two decades and trends in average gross receipts do not indicate recent
improvements.

Data from the SBO and SMOBE also indicate that minority-owned firms employed fewer workers on
average than non-minority firms. Levels of employment among Native American-, Hispanic-, and African
American-owned firms are especially low. Native-American films averaged 0.9 employees per firm. Asian,
Native Hawaiian and Pacific Islander firms averaged 2 employees, Hispanic-owned firms averaged 1
employee, and African American-owned firms averaged 0.6 employees. In comparison, non-minority firms
had a mean employment level of 2.8.

If we compare the average number of employees among employer firms the differences in
employment between minority and non-minority firms are smaller. In 2002 minority-owned firms had on
average 7.4 employees per employer firm, compared to 1 1 .2 employees for non-minority firms. Native
American firms averaged 7.8 employees, Asian firms averaged 6.9 employees, Native Hawaiian and
Pacific Islander averaged 7.9 employees, Hispanic-owned firms averaged 7.7 employees, and African
American-owned firms averaged 8 employees.^®

Conditioning on employment, racial patterns differ somewhat, and there is evidence that minority
employer firms have gained some ground on non-minority employer firms. Table 4 reports estimates of
mean annual payroll and payroll per employee by race for the subsample of employer firms. Minority
employer firms have made gains relative to non-minority employer firms in recent years, although all four
minority groups had lower average payrolls and payrolls per employee than non-minority employer firms,
in 2002, ait four minority groups had average payrolls that were roughly equal to or less than $200,000
compared with an average payroll of $333,494 among non-minority firms. Much of the difference Is due
to the number of paid employees. The average payroll per employee was not substantially higher among
non-minority employer firms. Payroll per employee was $29,842 for non-minority employer firms compared
with $26,848 for Native-American employer firms, $25,352 for Asian employer firms, $23,888 for Hispanic
employer firms, and $23,277 for African American employer firms. Minority-owned firms are employing
workers at similar wages as non-minority firms, and are the backbone of many minority communities across
the nation.

fsirlic mdRohb, Race and ErUrepreneuria! Success: Black-, Asian-, and White-Chvmd Businesses in the United States.

Black and I lispanic firms arc also found to be overrepresented at the bottom of the sales distribution and underrepresented at the top of the sales
distribution comp^ed to non-minorit>' Anns (Fairiie and Robb. Race and Entrepreneurial Smxss: Black-. Asian-, and While-Owned Businesses in
the UnitedStates). This findirtg indic^es that higher average sales among non-minority-owned businesses arc not being driven by a few businesses
wiili very high revenues.

US. Department of Commerce, Minority Business Development Ags3«q.-, Characteristics of Minority Businesses and Entrepreneurs.

Ibid.

The new compilation of Census Bureau data reported here and described more thoroughly in a recent
publication^® indicates that although minority firms nnake large contributions to the U.S. economy they
have not achieved parity with non-minority firms. Minority firms have made progress, but continue to have
lower average gross receipts, employment, and total payroll than non-minority firms. Under economic
parity conditions, minority firms would have grossed about $2.5 trillion in receipts and employed 16.1 million
workers.®®

Fairiie and Robb, Race and Entrepreneurial Success: Black-, Asian-, and White-Owned Businesses in the United States.

U.S. Department of Commerce. Minority Bu.siness Development Agency, The State of Minority Business Enterprises. An Overview of the
2002 Survey of Business Owners. Number of Firms, Gross Receipts, and Paid Employees.

Previous Research on Constraints Faced by Minority-Owned Businesses

What are the barriers faced by minority-owned businesses limiting business ownership and
performance? This section reviews previous studies exploring these constraints. We emphasize the role
of financial constraints because of their importance.

Financial Capital Constraints

Financial constraints are the most significant Issue affecting minority business ownership and
business performance. The importance of personal wealth as a determinant of entrepreneurship has been
the focus of an extensive body of literature. Numerous studies using various methodologies, measures
of wealth and country microdata explore the relationship between wealth and entrepreneurship. Most
studies find that asset levels (e.g. net worth) measured in one year increase the probability of starting a
business by the following year.^’ The finding has generally been interpreted as providing evidence that
entrepreneurs face liquidity constraints.

Do inequalities in personal wealth then translate into disparities in business creation and ownership?
To get an idea of the importance of access to financial capital in contributing to racial disparities in business
ownership, one only has to look at the alarming levels of wealth inequality existing in the United States.
Estimates from the U.S. Census Bureau^^ indicate that half of all Hispanic families have less than $7,950 in
wealth, and half of all African American families less than $5,446. Wealth levels among whites are 11 to 16
times higher. Low levels of wealth and liquidity constraints create a substantial barrier to entry for minority
entrepreneurs because the owner’s wealth can be invested directly in the business, used as collateral to
obtain business loans or used to acquire other businesses. Investors frequently require a substantial level
of owner’s investment of his/her own capital as an incentive, commonly referred as “skin in the game."

” David S. Evans and Boyan Jovanovic, "An Estimated Model of Entrepreneurial Choice under Liquidity Constraints,’’ ./owma/ of Political
Economy 97, no, 4(1989): 808-827. David S, Evans and Linda S, Leighton, "Some Empirical Aspects of Entrepreneurship,” /fmencort
Economic Review 79 (June 1989): 519-535, Bruce Meyer, "Why Are fhercSoFcw Black Entrepreneurs?” National Bureau of Economic
Research, Working Paper No. 3537 (1990). Douglas Holtz-Eakin, David Joulfaian, and Harvey S. Rosen, ‘'Enireprencuria! Decisions and
Liquidity Constraints.” RAND Journal of Economics 25, no. 2 (1994): 334-347. Thomas Lindh and Henry Ohlsson, “Self-Employment
and Windfall Gains: Evidence from the Swedish Lottery,” Economic Joitrnal 106. no, 439 (1996): 1515-1526. Jane Black. David de Meza,
and David Jeffreys. “House Prices, The Supply of Collateral and the Enterprise Economy.” The Economic Journal 106, no. 434 (1996): 60-
75, David G. Bianchflower and Andrew J, Oswald. “What M^es and Entrepreneur?" Jowmo/ o/ic76or Economic.'/ 16, no. I (1998): 26-60.
Thomas A. Dunn and Douglas J. Holtz-Eakin, “Financial Capital, Human Capital, and the Transition to Self-Employment: Evidence from
Intergenerational Links," Journal of Labor Economics 18, no. 2 (2<K)0): 282-305. Robert W. Fairlie, “The Absence ofthe African American
Owned Business: An .Analysis of the Dynamics of Self-Employ ment,” Journal of labor Economics 17, no 1 (1999): 80-108. John S. Carle
and Zuzana Sakova, “Business Start-Ups or Disguised Unemployment? Evidence on the Character of Self-Employment from Transition
Economies,” Labour Economics 7. no. 5 (2000): 575-601. Edvard Jdiansson, "Self-Employment and l,,iquidity Constraints: Evidence from
Finland,” Scandinavian Journal of Economics 102, no. 1 (2000); 123-134. Mark P. Taylor, “Self-Employment and Windfall Gains in Britain:
Evidence from Panel Data,” Economica 68, no. 272 (2001); 539-565. Doi^ias Holtz-Eakin and Harvey S. Rosen, “Cash Constraints and
Business Start-Ups; Deutsclunarks versus boWais." Contribmions to Economic Analysis A Policy 4, no. 1 (2005). Robert W, Fairlie and Harry
A. Krashmsky, “Liquidity Constraints, Household Wealth, ^d Entrepreneurship Revisited,” Working Paper (2008)

’• U.S, Census Bureau, Wealth and Asset Ownership, 2008 (accessed July 2009); available from http://\\vAv.census-gov/lihes/www/weaith/2002/
vvlth02-l.htmL

Tables

Median Houselraid Net Worth by
Ethnicity/Race, 2002

Median Net Worth

Total

$58,905

Non-minc»ity

$87,056

Asian ca* Pac. Islander

$59,292

Hispanic

$7,950

African-^erican

$5,446

Source: U.S. Census Bweau, Housing and
Household Economic Statistics Division (2008).

Racial differences in home equity may be especially Important in providing access to startup capital.
Less than half of Hispanics and African Americans own their own home compared with three quarters of
non-minorities. Asian Americans also have a low rate of home ownership at 57 percent.®^ The median
equity of Hispanic and African American home owners is also substantially lower than for non-minorities
($49,000 for Hispanics. $40,000 for blacks, and $79,200 for whites). Homes provide collateral and home
equity loans provide relatively low-cost financing. Without the ability to tap into this equity many minorities
will not be able to start businesses.

Previous studies found that relatively low levels of wealth among Hispanics and African Americans
contribute to their lower business creation rates relative to their representation in the U.S. population.
Indeed, recent research using statistical decomposition techniques provides evidence supporting this
hypothesis. Using matched CPS Annual Demographic Files (ADF) data from 1998 to 2003, Robert Fairlle
found that the largest single factor explaining racial disparities in business creation rates are differences in
asset levels.^ Lower levels of assets among African Americans account for 1 5.5 percent of the difference
between the rates of business creation among whites and blacks. This finding is consistent with the
presence of liquidity constraints and low levels of assets limiting opportunities for African Americans to start
businesses. The finding is very similar to estimates reported by Fairlie in a 1999 study^® for men using the
Panel Study of Income Dynamics (PSID). Estimates from the PSID indicate that 13.9 to 15.2 percent of the
biack/white gap in business start rates can be explained by differences in assets.

Fairlie also found that differences In asset levels represented a major hindrance for business creation
among Hispanics,^® Fairlie and Christopher Woodruff focused on the causes of low rates of business
formation among Mexican Americans in particular.®^ One of the most important factors in explaining the
gaps in rates of business creation between Mexican Americans and non-Hispanic whites is also assets.
Relatively low levels of assets explain roughly one quarter of the business entry rate gap for Mexican
Americans. Magnus Lofstrom and Chumbei V\feing analyzed SIPP data and also found that low levels of
wealth for Mexican Americans and other Latinos work to lower self-employment entry rates.®® Apparently,
low levels of persona! wealth limit opportunities for Mexican Americans and other Latinos to start businesses.

” Fairlie and Robb, Race and Entrepreneurial Success: Black-, Asian-, and iEhite-Owned Businesses in the United Slates, and U .S. Census
Bureau, Wealth and Asset Ownership, 2008 (accessed July 2009); available from hMp;//www.census.gov/hhes/www/weaUh/2002/with02-2.html.
'■* Robert W. Fairlie, “Entrepreneurship among Disadvantaged Groups: An Analysis of the Dynamics of Self-Employment by Gender, Race and
Education.” in The Life Cycle of Entrepreneurial Ventures, International Handbook Series on Entrepreneurship, ed. Simon Parker (New York:
Springer, 2006).

Fairlie, “The Absence of the African American Ovmcd Basiness: An Analysis of the Dynamics of Self-Employment.”

Robert W. Fairlie, “Entrepreneurship among Disadvant^d Groi^: An An^ysisofthe f)ynfflntcs ofSelf-Employment by Gender, Race and Education.”
” Robert W Fairlie and Christopher Woodruff, “Mcxicmi-Amcrican &itreprencurship,” Urriversity of California Working Paper (2009),

’* Magnus Lofstrom and Chunbei Wang, “Hispanic Self-Employment: A Dynamic Analysis of Business Ownership,” University of Texas at
Dallas Working Paper (2006).

Although previous research indicates that low levels of personal wealth result in lower rates of
business creation among minorities, less research has focused on the related question of whether low
levels of personal wealth and liquidity constraints also limit the ability of minority entrepreneurs to raise
adequate levels of startup capital. Undercapitalized businesses will likely have lower sales, profits and
employment and will be more likely to fail than businesses receiving optima! levels of startup capital.
Evidence on the link between startup capital and owner’s wealth is provided by examining the relationship
between business loans and personal commltrr^nts, such as using persona! assets for collateral for
business liabilities and guarantees that make owners personally liable for business debts. Robert B.

Avery, Raphael W. Bostic and Katherine A. Samolyk^® used data from the SSBF and Survey of Consumer
Finances (SCF) and found that the majority of all small business loans have personal commitments. The
common use of personal commitments to obtain business loans suggests that wealthier entrepreneurs may
be able to negotiate better credit terms and obtain larger loans for their new businesses possibly leading to
more successful firms.‘'° Ken Cavalluzzo and John Wolken also found in their study'*’ that personal wealth,
primarily through home ownership, decreases the probability of loan denials among existing business
owners. If personal wealth is important for existing business owners in acquiring business loans then it
may be even more important for entrepreneurs in acquiring startup loans.

Estimates from the 1992 CBO microdata indicate that Hispanic- and African American-owned
businesses have very low levels of startup capital relative to non-Hispanic white-owned businesses.'*^

For example, less than 2 percent of African American firms start with $100,000 or more of capital and
6.5 percent have between $25,000 and $100,000 in startup capital. Hispanic firms also have low levels
of startup capital although the disparities are not as large. African American-owned firms are also found
to have lower levels of startup capital across alt major industries.'*’ What are the consequences of these
racial disparities in startup capital? Previous research Indicates that the level of startup capital Is a strong
predictor of business success.'*^ In turn, low levels of startup capital are found to be a major cause of
worse outcomes among African American-owned businesses. Using earlier CBO data in his 1997 study.
Timothy Bates found evidence that racial differences in business outcomes are associated with disparities
in startup capital.'*® More recent estimates indicate that lower levels of startup capital among African
American firms are the most important explanation for why African American-owned businesses have lower
survivor rates, pncfits, employment and sales than non-minority-owned businessas.^^ In contrast to these
patterns, Asian firms are found to have higher startup capital levels and resulting business outcomes.*'^

Robert B. Avery, Raphael W, Bostic, and KatlieriiteA, Samolyk, “The Role of Personal Wcadth in Small Business Finance," Jowno/ of
Banking and Finance 22, no. 6 (1998): 1019-I061.

Astebro and Berhardt (2003) found a positive relationship between business survival and having a bank loan at startup after controlling for
owner and business characteristics.

*' Ken Cavalluzzo and .lohn Wolken, “Small Business Loan Turndowns, Personal Wealth and Discrimination." Journal of Business 78, no. 6
(2005): 2153-2177.

U.S. Census Bureau, 1992 Economic Census: CharacterisUcs of Business Owners. Fairlicand Robb. Race and Entrepreneurial Success:
Btack-. Asian-, and White-Owned Businesses in the United States.

U.S. Census Bureau, 1992 Economic Census: Characteristics of Business Owners.

“ Timothy Bates, Race, Self-Employment & Upward Mobility: An Illusive American Dream {Washington, D.C.: Woodrow Wilson Center Press
and Baltimore: John Hopkins University Press, 1997), and Fairlie and Robb, Rckb and Entrepreneurial Success: Black-. Asian-, and White-
Owned Businesses in the United States, provide two recent examples.

Bates. Race, Self-Employment <§ Upward Mobility: An Illusive American Dream.

Fairlie and Robb, Race and Entrepreneurial Succes.s: Black-, Asian-, and White-Owned Businesses in the Untied States.
ibid,

Minority and non-minority entrepreneurs differ ir> the types of financing they use for their businesses,
Previous research indicates, for example, that African Mierican entrepreneurs rely less on banks than
whites for startup capital/® African Americans are also less likely to use a home equity line for startup
capital than are whites, which may be partly due to the lower rates of home ownership reported above.

On the other hand. African American business owners are more likely to rely on credit cards for startup
funds than are white business owners. In a few studies using the 1987 CBO, Bates'*® found large
differences between African American and white-owned firms in their use of startup capital. African
American firms were found to be more likely to start with no capital, less likely to borrow startup capital
and more likely to rely solely on equity capital than white firms. Bates®® also found that loans received by
African American films borrowing startup capital are significantly smaller than those received by white-
owned firms even after controlling for equity capital and owner and business characteristics such as
education and industry. Previous research also indicates that MBEs are more likely to use credit cards
and less likely to use bank loans to start their businesses than non-minority-owned businesses.®*

Additional evidence on racial differences In access to financial capital Is provided by published
estimates from the CBO.®^ The CBO questionnaire asks owners with unsuccessful businesses from 1992
to 1 996 why their businesses were unsuccessful. African American business owners were two to three
times more likely as all business owners to report “lack of access to business loans/credit” or “lack of
access to personal loans/credit” as a reason for closure. Hispanic business owners were also more likely
to report that lack of access to financial capital was a reason for closure.

Minority firms also have trouble securing funds from venture capitalists and angel Investors. Private
equity funds targeting minority markets are very small relative to the total, which is problematic because
these funds appear to be important for success.®^ Minority angels comprise 3.6 percent of all angel
investors, and MBEs comprise 3.7 percent of firms presenting their business ideas to potential angel
investors.®^ The disparity in access to venture capital funds does not appear to be driven by performance
differences. Bates and William D. Bradford®® examined the performance of investments made by venture
capital funds specializing in minority firms and found that these funds produce large returns. Venture
capital funds focusing on investing in minority firms provide returns that are comparable to mainstream
venture capital firms. Funds investing in minority businesses may provide attractive returns because the
market is underserved.

US. Census Bureau, J992 Economic Census: Characteristics of Business Owners.

Bates, Race, Self-Employment & Upward Mobility: An Illusive American Dream. Timothy Bates, “Financing Disadvantaged Firms." Ciedtl
Markets for the Poor, eds. Patrick Bolton and Howard Rosenthal. (New York: Russell Sage Foundation, 2005).

Bates, Race. Self-Employment Upward Mobility: An Illusive American Dream.

US. Department of Commerce, Minority Business Development Agenev', Characteristics of Minority Businesses and Entrepreneurs.

” US Census Bureau. 1992 Economic Census: Characteristics of Business Owners.

" Milken Institute and the Minority Business Development Agency, The Minority Business Challenge: Democratizing Capital for Emerging
Domestic Markets, Glenn Yago and Aaron Pardcrat (2000).

Jeffrey Sohl, “The Angel Investor Market in 2008: A Down Year In Investment Dollars But Not In Deals,” Center for Venture Research, 2008
(accessed July 17, 2009); available from http.7/wsbc-unh-eda^files/2008_Analysis_Report_FinaI,pdf.

Timothy Bates aid Willim D. Bradford, “Venture-Capital Invwtment in Minority Business," Journal of Money Credit and Banking 40, no.
2-3 (2008): 489-504.

Evidence of Lending Discrimination

A factor posing a barrier to obtaining financial capital for minority-owned businesses is racial
discrimination in lending practices. Much of the recent research on the issue of discrimination in business
lending uses data from various years of the Survey of Small Business Finances (SSBF). The main finding
from this literature is that MBEs experience higher loan denial probabilities and pay higher interest rates
than white-owned businesses even after controlling for differences in credit-worthiness, and other factors.^

Cavalluzzo and Woiken^^ found in their study using the 1998 SSBF that while greater personal wealth
is associated with a lower probability of denial, even after controlling for personal wealth, there remained
a large difference in denial rates across demographic groups. African Americans, Hispanics, and Asians
were ail more likely to be denied credit, compared with whites, even after controlling for a number of owner
and firm characteristics, including credit history, credit score, and wealth. They also found that Hispanics
and African Americans were more likely to pay higher interest rates on loans that were obtained. They
also found that denial rates for African Americans increased with lender market concentration, a finding
consistent with G. Becker’s classic theories of discrimination.®® Using the 2003 SSBF, Blanchflower
(2007)®® also found Asian Americans, Hispanics and African Americans were more likely than whites to be
denied credit, even after controlling for creditworthiness and other factors.

Using the 1993 National Survey of Small Business Finances (NSSBF). Cavalluzzo, Linda Cavalluzzo,
and Wolken®° found that all minority groups were more likely than whites to have unmet credit needs.
African Americans were more likely to have been denied credit, even after controlling for many factors
related to creditworthiness, in fact, denial rates and unmet credit needs for African Americans widened
with an increase in lender market concentration. The fear of denial often prevented some individuals from
applying for a loan, even when they had credit needs. Hispanics and African Americans most notably had
these fears. David G. Blanchflower, P. Levine, and D. Zimmerman conducted a similar analysis with similar
results, but did not have access to some of the proprietary information available to researchers from the
Federal Reserve. However, they did find that African American-owned businesses were more likely to
have a loan application denied, even after controlling for differences in creditworthiness, and that African
Americans paid a higher interest rate on loans obtained. They also found that concerns over whether a
loan application would be denied prevented some prospective borrowers from applying for a loan in the first
place. The disparities between the denial rates between whites and African Americans grew when taking
these individuals into consideration along with those that actually applied for a loan. R. Bostic and K. P.
Lampani®^ include additional geographic controls and continue to find a statistically significant difference in
approval rates between African Americans and whites.

Lloyd Blanchard, John Yinger and Bo Zhao, “Do Credit Market Barriers Exist for Minority and Women Entrepreneurs?” Syracuse University
Working Paper (2004), Blanchflower, Levine, and Zimmerman. Cavalluzzo, Cavalluzzo. and Wolken. Cavalluzzo and Wolken. Susan
Coleman, “The Borrowing Experience of Black and Hispmiic-Ovvncd Small Finns: Fividence from the 1998 Survey of Small Business
Finances,” The Academy of Entrepreneurship Journal 8, no. I (2002); 1-20. Susmi Coleman, “Borrowing Patterns for Small Firms: A
Comparison by Race and Ethnicity." The Journal of Entrepreneurial Finance & Business Ventures 7, no, 3 (2003): 87-108, United Slates Small
BiLsiness Administration, Office of Advocacy, Availability of Financing to Small Firms using the Survey of Small Business Finances, K. Mitchell
and D-K, Pearce, (2005),

Cavalluzzo and Wolken,

G, Becker, The Economics of Discrimination, 2nd ed, (Chicago; University of Chicago Press, 1971),

David G. Blanchflower, “Entrepreneurship in the United Stales,” 12^ Working Paper No, 3130 (2007),

Cavalluzzo, Cavalluzzo, and Wolken,

R. Bostic and K.P, Lampani, “Racial Diflerences in Patterns of Small Busine^ Fmaicc' The Importance of Loed Geography," Working Paper (1999),

other Types of Discrimination

Discrimination against minority businesses may occur before these businesses are even created.
Previous research indicates that minorities have limited opportunities to penetrate networks, such as those
in construction.®^ |f minorities cannot acquire valuable work experience in these industries then it will limit
their ability to start and operate successful businesses. There is also evidence in the literature indicating
consumer discrimination against minority-owned firms. Minority firms may have difficulty selling certain
products and services to non-minority customers limiting the size of their markets and resulting success.
According to a study of microdata from the 1980 Census,®® African Americans negatively select into self-
empioyment, with the most able African Americans remaining in the wage/salary sector, whereas whites
positively select into self-employment and negatively select into wage/salary work. These findings are
consistent with discrimination by white consumers. Among African Americans low earners are the most
likely to enter into business ownership, whereas both low and higher earning whites are the most likely
to enter self-employment.®** He notes that this finding is consistent with the theoretical predictions of
consumer and credit mar1<et discrimination against African Americans.

More generally, minority-owned firms may face limited market access for the goods and services that
they produce.®® This may be partly due to consumer discrimination by customers, other firms, or redlining.
But, it may also be due to the types, scale and locations of minority firms. Published estimates from the
CBO®® indicate that African American-, Hispanic-, and other minority-owned businesses are all more likely
to serve a local market than the average for all U.S. firms. Minority firms are more likely than white firms
to report that their neighborhood is the geographic area that best describes where the business’s goods
and services are sold. Furthermore, minority-owned businesses are much more likely to sell to a minority
clientele than are white businesses, which may reflect more limited market access.

Human Capital Barriers

Education has also been found In the literature to be a major determinant of business ownership.®^
Lower levels of education obtained by Hispanics and African Americans partly limit their business
ownership rates.®® According to an analysis of CPS data by Fairlie,®® 6.0 percent of the black/white gap in
self-employment entry rates is explained by racial differences in education levels. Similar estimates from
the PSID are reported in another study.^® Mexican Americans have even lower levels of education than
African Americans, which translate into a limiting factor for business creation. Estimates from the CPS
Indicate that education differences account for 32.8 to 37.9 percent of the entry rate gap for Mexican

‘“Timothy Bates, Banking on Black Enterprise (Washington, D.C.: Joint Center for Political and Economic Studies, 1993). Joe R. Feagin
and Nikitah imani, “Racial Barriers to African American Entrepreneurship: An Exploratory Study,” .9oao//’roWe/nr 41, no. 4 (1994): 562-585.
Timothy Bates and David Howell, “The Declining Status of African American Men in the New York City Construction Industry.” Race.

Markets, and .Social Outcomes, eds. Patrick Mason and Rhonda Williams (Boston: Kluwer, 1 997).

George Borjas and Stephen Bronars, "Consumer Discrimination and Self-Employment,’ Vo«ma/ tyPoMco/ Economy 97, no. 3 (1989): 581-605.

Daiji Kawaguchi, "Negative Self Selection into Self-Eunploytncnt among African AmerKans,” Topics in Economic Anafysis & Roli'a' 5, no. I (2005): 1-25.
‘‘ Bates, Race. Self'Emphyment A Upward Mobility: An illusive American Dream.

U.S. Census Bureau, 1992 Economic Census: Characteristics of Business Owners.

J, van der Sluis, M. van Praag and W. Vijveiiwrg. Education and Entrepreneurship in Indusirialted Countries: A Meta-Analysis. Tinbergen
Institute Working Paper no. TI 03-046/3 (Amsterdam: Tinbergen Institute, 2004). Simon C. Parker, The Economics of Self-Employment and
Entrepreneurship (Cambridge: Cambridge University Press, 2004). U.S. Small Business Administration. Office of Advocacy, Educational
Attainment and Other Characteristics of the Self-Employed: An Examination Using the Panel Study of Income Dynamics Data. C. Moutray,
Working Paper (2007).

Minority business owners are found to be less likely to use technology which may be related to lower levels of human capita!, U.S.

Department of Commerce, Economic Statistics Administration and the Minority Business Development Agency.

Fairlie, Entrepreneurship among Disadvantaged Groups: An Analysis of the Dynamics of Self-Employment by Gender. Race and Education.

Fairlie. “The Absence of the African American Owned Business: An Analysis of the Dynajuics of Self-Employment.”

Americans/’ Education is important in explaining differences In business creation rates between Mexican
Americans and whites, as well as the types of businesses entrepreneurs are likely to pursue. ^^The high
rate of business ownership by Asians is in part due to their relatively high levels of education/^ These
results, however, are for all Asians and some groups are less educated. Fairlie, Zissimopoulos, and
Krashinsky find, for example, that Vietnamese immigrants have lower levels of education than the national
average.

Previous research indicates an even stronger relationship between the education level of the owner
and business performance. Businesses with highly educated owners have higher sales, profits, survival
rates, and hire more employees than businesses with less-educated owners.^® The general and specific
knowledge and skills acquired through forma! education may be useful for running a successful business
and the owner’s level of education may also serve as a proxy for his/her overall ability or as a positive
signal to potential customers, lenders or other businesses. The estimated relationships between owner’s
education and small business outcomes are strong even after controlling for family business background
measures, startup capital levels and industries.

Lower levels of education may be challenging the business performance of some minority
entrepreneurs, such as Hispanics and African Americans.™ Mexican American business owners have
lower incomes than non-Hispanic white business owners, and most of the difference is due to low levels of
education among Mexican American owners.” Mexican American business owners, especially Immigrants,
have substantially lower levels of education. The single largest factor in explaining why Mexican immigrants
and U.S. born Mexican Americans have lower business income than whites is education. Lower levels of
education account for more than half of the gaps in business income.

Another measure of human capital relevant for Hispanics Is language ability. Limited English
language ability may make it difficult to communicate with potential customers and suppliers, and learn
about regulations. Previous studies provide some evidence that a better command of the English language
Is associated with higher business ownership rates.™ But, the evidence linking language ability to business
performance is even stronger. Fairlie and Woodruff found that one of the most important factors explaining
low business incomes among Mexican American businesses is language ability. For Mexican immigrant
men, limited ability to speak English explains roughly one third of the gap in business income.

’‘F'airfic and Woodruff
’’ Lofstrom and Wang.

Fairlie. Entrepreneurship among Disadvantaged Groups: An Analysis of the Dynamics qfSelf-Empioymeni by Gender, Race and Education.

Robert W Fairiie. Julie Zissimopoulos, and Harr>- Krashinsky, “The Intemaliona! Asian Business Success Story? A Comparison of Chinese,
Indian and Other Asian Businesses in the United States, Canada and United Kingdom," in International Differences in Entrepreneurship, eds,
Joshua Lerncr and Antoinette Schoar (forthcoming), (accessed Octolwr 2009); available from http://ww-w.nber org/chapters/c8221 , pdf

Bates, Race, Self-Employment A Upward Mobility: An Illusive American Dream. U.S, Department of Commerce, Economic Statistics
Administration and the Minority Business Development Agency. Astebro Thomas and Irwin Bernhardt, “Start-Up Financing, Owner
Characteristics and Survival," Journal of Economics and Business 55, no. 4 (2003): 303-320. Alicia Robb, The Role of Race. Gender, and
Discrimination in Business Survival, Doctoral Dissertation, (Ann Arbor: University of Michigan Press, 2000). van dcr Siuis, van Praag, and
Vijverberg.

Fairlie and Robb, Race and Entrepreneurial Success: Black-. Asian-, and White-Owned Businesses in the United States.

Fairlie and Woodruff. Magnus Lofstrom, and Timothy Bates, “Latina EnVKptenevts," Small Bustms.s Economics (2009) (forthcoming).

Robert W, Fairiie and Bruce D. Meyer, “Ethnic and Racial Self-Employment Differences and Possible Explanations,” Journal of Human
Resources 51, no. 4 (1996): 757-793. Fairlie and Woodruff.

Family Business Background and Social Capital

Research also indicates that the probability of self-employment is substantially higher among the
children of the self-employed/® These studies generally find that an individual who had a self-employed
parent is roughly two to three times as likely to be self-employed as someone who did not have a self-
employed parent. There is evidence that this strong intergenerational link in business ownership is
detrimental to disadvantaged minorities. In a study by Michael Hout and Harvey S. Rosen®° they note a
“triple disadvantage” faced by African American nr«n in terms of business ownership. They are less likely
than white men to have self-employed fathers, to become self-employed if their fathers were not self-
employed, and to follow their father in self-employment. Another study®’ provides evidence from the PSID
that current racial patterns of self-employment are in part determined by racial patterns of self-employment
in the previous generation.

Recent research indicates that family business backgrounds are also extremely important for the
success of businesses.®^ More than half of all business owners had a self-employed family member prior
to starting their business with many of these business owners working in those family businesses. Working
in a family business leads to more successful businesses. Business outcomes are 15 to 27 percent better
if the owner worked in a family business prior to starting his or her own business even after controlling
for other factors. African American business owners have a relatively disadvantaged family business
background compared with white business owners. African American business owners are much less likely
than white business owners to have had a self-employed family member prior to starting their businesses
and are less likely to have worked in that family member’s business. Only 12.6 percent of African American
business owners had prior work experience in a family member’s business compared with 23.3 percent of
white business owners. Hispanic business owners are also less likely to have self-employed parents and
work in family businesses than non-minority business owners.” This lack of prior work experience in family
businesses among future minority business owners, perhaps by restricting their acquisition of general and
specific business human capital, limits the success of their businesses relative to whites. This creates a
cycle of low rates of business ownership and relatively woree business outcomes being passed from one
generation of minorities to the next.®^

Related to the family business background constraint, previous research also indicates that the size
and composition of social networks are associated with self-employment.®® If minority firms have limited
access to business, social or family networks or have smaller networks then they may be less likely to enter
business and create successful businesses. These networks may be especially important in providing
financing, customers, technical assistance, role models, and contracts, but it is difficult to identify their
contributions to racial differences in business performance.®® Limited networks manifest themselves in

Bernard Lentz and David l.aband, ‘Entrepreneurial Success and Occupational Inheritance among Proprietors,” Canadian Journal of
Economics 23. no. 3 (1999): 563-579. Fairlie, “The Absence of the African American Owned Business: An Analysis of the Dynamics of Self-
Employment.” Thoma.s A. Dunn and Douglas J. Holtz-Eakin, “Financial Capital, Human Capita!, and the Transition to Self-BmpioymenL
Evidence from Intergenerational Livksf Journal of Labor Economics 1 8, no. 2 (2000); 282-305. Michael Hout and Harvey S. Rosen, “Self-
Employment, Family Background, wid Race.” Journal of Human Resources 35, no. 4 (2000): 670-692.

1 lout and Rosen.

Fairlie, “The Absence of the African American Owned Business; An Analysis of the Dynamics of Self-Employment "

Robert W. Fairlie and Alicia M. Robb. “Why are Black-Owned Bu-sinesses Less Successful than White-Owned Businesses: The Role
of Families, Inheritances, and Business Homan CspiXiA'' Journal of Labor Economics 25 (2007); 289-323. Fairlie-Robb, Race and
Entrepreneurial Success: Black-.Asian-, and White-Owned Businesses in the United Stales.

U.S. Census Bureau, 1992 Economic Census: Characteristics of Business Owners.

Fairlie-Robb, Race and Entrepreneurial Success: Black-. Asian-, and White-Owned Busme.xses in the Untied Stales.

*- W David Allen, “Social Networks and Sc](~Emp]oymenl,'’ Journal of Socio-Economics 29, no. 5 (2000); 487-501.

These networks may also be important in forming strategic aliitnees witfi other firms as discussed in Leonard Greenhalgh, Increasing MBE
Competitiveness through Strategic Alliances (Washington D.C.; MinorifV’ Business Development Agency, U.S. Department of Commerce, 2008).

many of the factors listed below such as financial capital, discrimination, and human capital. For example,
minority businesses are known to have limited networks in the investment community resulting in lower
levels of capital use.®^ Given these interactions and ttie Inherent difficulty of measuring networks, it is
difficult to identify their effects on business performan<».

Department of Commerce, Minority Business Development Agency. Accelerating Job Creation and Economic FroducUvity: Expanding
Financing Opportunities for Minority Businesses (2004).

The Current Financial Crisis

The current financial crisis creates special challenges to MBEs in securing financing. It is likely that
the constraints mentioned in the previous section will probably get much worse. To get some insight into
what is happening we investigate current trends in several measures. Although it is difficult to obtain recent
data on the use of startup and expansion capital, we examine trends in related measures. We first focus
on factors affecting the personal wealth of the entrepreneur.

Figure 1

Quarterly Housing Price Index, Federal Housing Finance Agency

The largest single asset affecting personal wealth is home equity. Over the past two years housing
values have dropped precipitously. Figure 1 displays the Monthly House Price Index from the Office of
Federal Housing Enterprise Oversight from January 2004 to February 2009. The peak in the housing
market was in the summer of 2007, but has steadily dropped since then with evidence of a slight rebound.
The recent decline in housing equity does not bode well for access to financing. Home equity is found to
be a major determinant of starting a business in the United States.®® The decline in housing values is likely
to further limit the amount of capital available to minority entrepreneurs.

Fairlie and Kra.shinsky.

Stock market investments represent ano^er component of personal wealth. The stock market has
fallen considerably over the past few years. TTte Dow JcKies Industrial Average dropped from over 1 1 ,000
in September 2008 to levels above 8,000 in May 2009 (Figure 2). The substantial drop in stock market
wealth has undoubtedly resulted in less personal wealth to Invest in businesses and use as collateral for
loans for entrepreneurs.

Figure 2

Dow Jones Industriai Average

More direct measures of access to capital are represented by the number of venture capital deals.
Figure 3 displays the number of venture capital deals made in the United States over the past couple of
years. The total number and amount of deals declined substantially since the second quarter of 2008. In
the first quarter of 2009 there were only 549 venture capital deals in the United States worth $3 billion
(Figure 3). These levels were half or less than half of what they were one year earlier, Additionally,
estimates of the total amount of funding from angel investors dropped by 26.2 percent from 2007 to 2008
resulting in total investments of $19.2 billion.®®

"'’Sohl.

Figure 3

Venture Capital Deals, PricewaterhouseCoopers/Nationai Venture Capital
Association MoneyTree Report

$9,000,000,000

$8,000,000,000

$7,000,000,000

$6,000,0)0.000

$5,000,000,000

$4,000,000,000

$3,000,000,000

2007-1 2007-2 2007-3 2007-4 2008-1 2008-2 2008-3 2008-1 2009-1

The decline in access to these potential sources of financial capital for businesses has resulted in a
rapid rise in the number of business bankruptcy filings. Business bankruptcy filings have increased sharply
in the last two quarters of 2008 (Figure 4). The number of bankruptcy filings increased to 12,901 in the
fourth quarter of 2008 from 7,985 one year earlier.

Figure 4

Total Business Bankruptcy Filings
Administrative Office of the U.S. Courts

Surveys of financial institutions provide another well-cited barometer of current conditions in the
financing market. A good summary of the os^rall climate for banking and finance is available in the Federal
Reserve’s “Beige Book.” The report from April 2009 notes that credit availability remains “very tight." The
report also notes deteriorating loan quality and rising d^inquencies for ail loan types and regions. Another
widely read source of the state of financing in the United States is the Federal Reserve’s Senior Loan
Officer Opinion Survey on Bank Lending Practices. The report from May 2009 also indicates that business
lending policies remain very tight, although there is some evidence that the tightening is easing. The
report also notes a continuing weakening of demand for business loans. As of this publication, the CIT
Group Inc., one of the nation’s largest and publicly traded lending institutions to small and medium size
enterprises, is facing a possible bankruptcy although it received funds from the Treasury last year as part
of its rescue package. There have been many other banks declaring bankruptcy as a result of the current
financial environment.

Surveys of small businesses indicate similar problems in the credit markets. A recent survey of small
businesses from the National Federation of Independent Business indicates a sharp drop in reported loan
availability over the past year. Small business owners were also more likely to report that they expected
credit conditions to worsen over the next few months. Optimism among small business owners is also
down considerably compared to a year ago. The American Express OPEN Small Business Monitor
indicates a more optimistic outlook for small business owners, but also notes that capital investments are at
their lowest level in the eight years surveys have been conducted. The Monitor’s findings are based from a
national semi-annual survey of 727 small business owners with fewer than 1 00 employees.

Alt of the recent trends presented here indicate worsening financial conditions. These trends and
those in the overall economy do not bode well for minority-owned businesses. Because of the limited
capita! available to minority-owned firms, they are likely to be especially vulnerable in the current economic
conditions. The gains experienced by minority firms in growth of number of firms, gross receipts and
employment between 1997 and 2002 could be reversed if minority business owners do not have adequate
access to capital.

New Empirical Analysis

In this section, we conduct a new empirical analysis of the barriers to financing faced by minority-
owned firms. The findings provide a broader discussion of the barriers to financing faced by minority
businesses and support some of the previous research discussed In Section 3.

Data Description

We use three sources of data for the analysis - the Survey of Business Owners (SBO), Kauffman
Firm Survey (KFS), and the Survey of Small Business Finances (SSBF). These are the most commonly
used and respected sources of data on financing of minority-owned businesses. We briefly describe each
of these data sources.

The SBO is conducted by the U.S. Census Bureau every five years to collect statistics that describe
the composition of U.S. businesses by gender, race, and ethnicity. This survey was previously conducted
as the Survey of Minority- and Women-Owned Business Enterprises (SMOBE/SWOBE). The universe
for the most recent survey is all firms operating during 2002 with receipts of $1 ,000 or more that filed
tax forms as individual proprietorships, partnerships, or any type of corporation. Businesses that are
classified as agricultural production, domestically scheduled airlines, railroads, U.S. Postal Service, mutual
funds (except real estate investment trusts), religious grant operations, private households and religious
organizations, public administration, and government are excluded. The SMOBE and SBO data have
undergone several major changes over time including the addition of C corporations and the removal of
firms with annual receipts between $500 and $1,000 starting in 1997.®°

The SBO and SMOBE/SWOBE surveys provide the most comprehensive data available on
businesses by the race, ethnicity, and gender of the owners. Business ownership is defined as having 51
percent or more of the stock or equity in the business. Business ownership was categorized by: Gender
(Male; Female; or Equally Male-/Female-Owned); Ethnicity (Hispanic, non-Hispanic): and Race (White;
Black or African American; American Indian or Alaska Native; Asian; Native Hawaiian or Other Pacific
Islander). The public use tables from the SBO/SMOBE are the most widely used source for tracking the
number, performance, size, and industry composition of minority-owned businesses in the United States.

In this section, we report detailed information on sources of startup and expansion capital by race from
published sources. Unfortunately, microdata from the SBO are not publicly available and require an
extensive application and disclosure process prohibiting additional analyses for this report.

To examine the use of capital among more established firms, we use microdata from the 2003 Survey
of Small Business Finances (SSBF). The SSBF is one of the only business-level datasets that provides
information on the owner, which is essential for identifying businesses owned by minorities. The SSBF is
conducted by the Board of Governors of the Federal Reserve System every five years. The 2003 SSBF
contains a large sample of 4,240 for-profit, non-governmental, non-agricultural businesses with fewer than
500 employees. The SSBF provides detailed Information on many owner and firm characteristics, including
credit histories, recent borrowing experiences, balance sheet data, and sources of financial products and
services used.®^

Fairlie and Robb, Race and Enirepreneurial Success: Black-, Asian-, and White-Owned Businesses in the United Stales.

Board of Governors of the Federal Reserve Sy-stem, “Financial Services Used by Small Businesses: Bvidence from the 2003 Survey of Smaii
Business Finances.” Federal Reset-ve Bulletin, Traci L. Mach and J<An D. Wolken (2006): 167-195 (accessed October 2009); available from
http://w\vw. federaIreserve.gov/pubs/buUeti n/2006/smailbusiness/sm^lbusin^.pdf

To examine access to financial capital among businesses in their early, formative years of
development we use confidential-access longitudinal microdata from the newly released Kauffman
Firm Survey (KFS). The KFS tracks a panel of almost 5,000 firms from their inception in 2004 through
2007, providing information on sales, employment, and owner characteristics. Also, the survey offers
unprecedented detail on the capital injections that these firms receive: not only when and how much capital
they receive, but detailed information of each financial injection. It includes whether the capital comes from
formal or informal channels, and whether it is equity or debt in the form of personal or business loans,
credit cards, or from other sources. Information cm up to ten owners includes age, gender, race, ethnicity,
education, work experience, and previous startup e)q)erience with large subsamples of MBEs. The KFS
is the only large, nationally representative, longitudinal dataset providing detailed information on new firms
and their financing activities over time. Most previous datasets are cross-sectional and focus on older, more
established firms.

Sources of Startup and Expansion Capital

We first examine sources of startup and expansion capital for minority-owned firms from the SBO.
Estimates are taken from the U.S. Department of Commerce, Minority Business Development Agency.^

We highlight some of the main findings here.

Table 6 reports sources of capital used to start or acquire the business by ethnic/racial group and
sales level. We define high sales firms as firms with $500,000 or more in annual sales. This is consistent
with MBDA's target market of MBE firms capable of generating significant employment and long-term
economic growth. The most common source of funding for minority businesses is personal and family
savings. More than half of all minority firms use this source of capital at startup. Among high sales firms
a higher percentage of minority businesses report the use of personal and family savings (7 1 .0 percent),
which is higher than for high sales non-minority firms. In addition, related to this source of financing 14.0
percent of high sales MBEs used other personal and family assets as sources of startup capital. Overall,
among firms with high-growth and employment potential, MBEs appear to be more reliant on personal
equity for financing than non-minority firms. For all firms, they use these sources similarly.

’^U-S. Department of Commerce, Minority Business Dewlopmenf Agency, Characteristics of Minority Businesses and Entrepreneurs.

Table 6

Sources of Capital Used to Start or Acquire the Business by Ethnicity/Race and Sales Levei {$500,000 or more)
Survey of Business (2002)

Personal/

family

savinqs

Other
personal/
^miiv assets

Persc^ed/
busirtess
credit card

Business
loan from
oovemment

Government
guaranteed
bank loan

Business
loan from
bank

Outside

investor

None

needed

American-lndian and

Total

51.9%

10.0%

12.2%

1.0%

0.8%

7.8%

2.0%

30.8%

Alaska Native

High Sales

66,8%

17.3%

12.0%

3.1%

3.9%

22.1%

5.7%

Low Sates

51.3%

9.6%

12.2%

0.9%

n/a

7.2%

1.9%

Asian

Total

61,4%

8.9%

9.6%

1.0%

8.0%

10.2%

3.1%

22.6%

High Sales

73.2%

13.7%

9.8%

2.2%

2,7%

25.7%

5.6%

Low Sales

60.2%

8.4%

9.5%

0.9%

0.6%

8.6%

2.8%

Native Hawaiian and

Total

52.6%

10.3%

12.7%

2.3%

0.4%

5.2%

2.1%

29.9%

Other Pacific

High Sales

66.5%

15.8%

n/a

20.3%

4.0%

Islander

Low Sales

51.9%

n/a

13.0%

n/a

Hispanic

Total

51.2%

6.7%

9.4%

0.8%

0.4%

5.6%

1.8%

33.1%

High Sales

69.0%

13.9%

11.6%

1.9%

2.3%

19.1%

4.4%

Low Sales

50.3%

6.3%

9.3%

0.7%

0.3%

4.9%

1.7%

African-American

Total

50,2%

7.1%

10.1%

1.1%

0.5%

5.7%

2.1%

33.0%

High Sales

68,2%

14.2%

13.2%

3.1%

4.1%

25.0%

4,9%

Low Sales

49.8%

6.9%

10.0%

1.0%

0.5%

5.2%

2.1%

Minority

Total

54,1%

7.7%

9.8%

1.0%

0.6%

7.2%

2.3%

29.7%

High Sales

71.0%

14.0%

n/a

23-3%

5.1%

Low Sales

53,1%

n/a

9.8%

n/a

Non-minority

Total

55.6%

9.3%

8.8%

0.8%

0.7%

12.0%

2.5%

27.4%

High Sales

64.9%

14.8%

n/a

29.2%

5,4%

Low Sales

53.5%

n/a

8.8%

n/a

Ail Respondent

Tola!

54.6%

9.0%

8.8%

0.9%

0.7%

11.4%

2.7%

27.7%

Firms

High Sales

60,6%

13.7%

6.8%

1.9%

2.1%

27.6%

6.5%

Low Sales

53.9%

8.5%

9.0%

0.8%

0,5%

9.6%

2.3%

Notes: (1) Source: 2002 Sun«y of Business Owners, as reported in U.S. Department of Commerce. Minority Business Oe>«lopment
Agency (2008). (2) Businesses with $1 ,000 or more in receipts are included. (3) High sales fimis are those with $500,000 or more in
annual sales.

A source of financing that has attracted much discussion in the literature is bank financing. We
discuss the use of bank financing by minority and non-minority fiims in more detail below using the SSBF
and KFS, but we first examine percentages of firms receiving this source of financing. Among all minority
firms, 7.2 percent received a business loan from a bank compared with 12.0 percent of non-minority
films. High sales minority firms were more likely to receive bank loans with 23.3 percent receiving this
source of startup capital. But, this level is lower than for high sales non-minority firms with 29.2 percent
receiving bank loans. The disparities in amounts of bank loans and other features of the loan are larger as
discussed below.

We also find that minority firms are more likely to rely on credit cards for startup capital, which is a
high-costs source, but the difference is not large. Minority and non-minority firms are similarly likely to
receive startup funding from outside investors.

Table 7 reports sources of capita! used to finance expansion or capital improvement by race and
receipts level. As expected the percentage of minority firms using personal and family saving and assets
for expansion Is lower than for startup. Among all minority firms 33.8 percent of firms reported these two
sources of capital for expansion. Use of this source of capital was higher for minority firms than non-
minority firms. High sales minority firms continue to rely more on credit cards than non-minority firms,
although the difference is not overly large. Finally, both all and high sales minority firms are less likely to
use bank loans to fund expansion than are their norv-mlnority counterparts.

Table 7

Sources of Capital Used to Finance Expansion or Capital Improvement of Sie Business by Ethnicity/Race and Sales Level {$500,000 or more)

Survey of Business Owners (2002)

Personal/

femily

savings

Other personal/
family assets

Persona!/
business
oedit card

Business

loan from

aovemment

Government
guaranteed
bank loan

Business
loan from
bank

Outside

investor

None

needed

American-lndian

Total

30.8%

7.1%

15.5%

0.7%

0.3%

7.6%

1.3%

52.7%

and Alaska Native

High Sales

28.1%

9.8%

13.0%

1.1%

n/a

29.7%

n/a

40,7%

Low Sates

30.9%

7.0%

15.6%

0.7%

n/a

6.7%

1.3%

53.2%

Asian

Total

31.4%

5.3%

10.6%

0.6%

0.4%

7.3%

1 .5%

53.6%

High Saies

27.5%

6.7%

10J2%

1.2%

1.1%

22.6%

2.4%

47,2%

Low Sales

31.8%

5.2%

10.7%

0.5%

n/a

5.7%

1 .4%

54.3%

Native Hawaiian

Total

28,6%

5.6%

13.6%

1.2%

0.9%

5.6%

55.3%

and Other Pacific

High Sales

27.4%

n/a

17.5%

n/a

23.4%

n/a

42.0%

Islander

Low Sales

28.7%

n/a

13.4%

n/a

55.9%

Hispanic

Total

26.5%

4.4%

10.9%

0.5%

0.3%

5,2%

1.3%

58.4%

High Sales

26.8%

6.7%

132%

1.6%

1.1%

27.4%

2.4%

41.8%

low Sales

26.4%

4.3%

10.8%

0.5%

0,2%

4,0%

1.3%

59.2%

African-American

Total

29.1%

4.8%

11.5%

0.7%

0.3%

4.1%

1.3%

56.3%

High Sales

28.0%

6.5%

14.3%

1.8%

2.1%

24,7%

1,7%

43.2%

Low Sales

29,2%

4.8%

11,5%

0.6%

0.2%

3.7%

1.3%

56.6%

Minority

Total

28.9%

4.9%

11.2%

0.6%

0,3%

5.7%

n/a

56,0%

High Sales

27,4%

n/3

1 1 .8%

n/a

24.7%

n/a

44.7%

Low Saies

29.0%

n/a

11.2%

n/a

56.7%

Non-minority

Total

25.0%

5.1%

11.7%

0.5%

0.3%

9.7%

n/a

59.0%

High Sales

21.2%

n/a

9.8%

n/a

30,2%

n/a

48.8%

Low Sales

25.9%

n/a

11.9%

n/a

80.1%

All Respondent
Firms

Total

High Sales
Low Sales

25,5%

5.0%

11.4%

0.5%

0.3%

9.2%

1.2%

58.5%

Notes: (1) Source: 2002 Survey of Business Owners, as reported in U.S. of Commerce. Mnority Business Development Pgency {2008). {2)
Businesses witfi $1,000 or more in receipt are included. (3) High sales firms are ^ose with $500,000 or more in annual sates.

The SBO data indicate some differences in the use of sources of startup and expansion capital
between minority and non-minority firms even when we focused on firms with $500,000 or more in annual
gross receipts. Minority firms generally rely more on personal and family equity and are less likely to obtain
bank loans than non-minority businesses. There is also some evidence of slightly higher use of credit
cards than non-minority firms.

Capital Use among More-Estabiished Minority Firms

The SSBF provides information on older, more-established firms. Average sales and employment of
firms in the SSBF are much higherthan the total fw all firms as reported in the SBO. We examine recent
equity investments and loans for these firms, Table 8 reports estimates for minority and non-minority firms
and high and low-sales firms. We defined high sales similarly as having annual gross receipts of at least

$500,000.

Tables

Equity Investmensts^id Loshi Amounts
Survey of Small Business Finances (2003)

Equity Investments Loans

Group

Sales

Employees

Pwcent

Mean

Percent

Mean

Total

Non-minority

$1,043,216

7.3

5.7%

$7,822

31.9%

$108,912

3,685

Minority

$992,207

6.5

5.1%

$3,379

23.6%

$46,514

555

Sales > $500,000

Non-minority

$3,103,310

19.2

6.1%

$19,377

52.4%

$310,232

1,868

Minority

$3,409,946

18.0

5.4%

$7,274

41.2%

$149,354

248

Sales < $500,000

Non-minority

$138,329

2.1

5.5%

$2,747

22.8%

$20,482

1,817

Minority

$116,392

2.3

5.0%

$1,969

17.2%

$9,261

307

Notes: (1) Ail estimates use survey weights provided by the SSBF. (2) The samples used to estimate mean equity
investments and loan amounts include firms not receiving those sources of funding.

We first examine equity investments in the firm. The question in the SSBF asks about new equity
investments from existing owners, new or existing partners, or new or existing shareholders (excluding
retained earnings) during the past year. For ail firms, minority businesses are less likely to receive new
equity investments than are non-minority businesses, but the difference is not overly large. MBEs are less
likely to receive equity investments even when conditioning on high sales firms, In ail cases, however, only
5 to 6 percent of firms receive new equity investments each year.

The main difference between minority and non-minority firms is the amount of new equity investments.
Although minority firms are almost as likely to receive new equity investments they receive much smaller
amounts of new equity. The average amount of new equity investments in minority high sales firms Is
$7,274, which is only 38 percent of the non-minority level. The average amount of new equity investments
in minority firms receiving equity investments is $3,379, which is 43 percent of the non-minority level. The
differences in average amount of equity investment are striking especially when noting that average sales
and employment levels are not that different between minority and non-minority firms (reported in Columns
1 and 2). Equity investments are notably lower in low-sales firms. Although not reported we also find that
a very small share of firms receiving new equity financing receive it from venture capital firms or public
offerings. In fact, no minority firms in the SSBF sample report either of these sources of financing.

We also examine minority/non-minority differences in loan usage. The SSBF questionnaire asks
about business loans received during the past 3 years. Table 8 reports estimates of the percent of firms
receiving loans. Minority firms are less likely to receive loans than non-minority firms. Among high sales
firms, 52 percent of non-minority firms received loans compared with 41 percent of minority firms. The
average loan amount for all high sales minority firms was $149,000. The non-minority average was more
than twice this amount at $310,000. If we condition for only high sales firms receiving loans, the minority/

non-minority difference in average loans is smaller, but a large gap in loan amounts remains. The average
loan received by high sales minority firms is $363,000 compared with $592, 000 for high sales non-minority
firms.

Although sample sizes are too small to report separate estimates, we find that there are substantial
differences within racial groups. Hispanic and African American owned firms have much lower levels of
loans than non-minority firms, and Asian and African American firms have much lower levels of new equity
investments than non-minority firms.

As noted above in Section 3, the SSBF has been used extensively to study the experience of
minority businesses in credit markets. We update the results of these studies using data from the 2003
SSBF. Table 9 reports estimates of loan denial rates, fear of applying, and interest rates for minority and
non-minority firms and by sales size. As found in previous studies, loan denial rates are much higher for
minority firms than for non-minority-owned firnis. This holds true for high sales firms and tow-sales firms.
For high sales firms, the rate of loan denial is almost twice as high for minority firms as for non-minority firms.

Table 9

Loan Denial Rates, Fear of Applying, and Interest Rates
Survey of Small Business Finances (2003)

Group

Denial Rate

Did not Apply:
Fear of
Reiection

Interest Rate

Total

Non-minority

12.3%

1,679

15.8%

3,685

6,4%

1,586

Minority

31 .5%

218

29.5%

555

7.8%

175

Sales > $500,000

Non-minority

8.4%

1,212

12.2%

1,868

5.9%

1,168

Minority

14.9%

132

18.8%

248

6.2%

123

Sales < $500,000

Non-minority

16.0%

467

17.4%

1,817

6.9%

418

Minority

41.9%

33.4%

307

9.1%

Note: All estimates use sample weights provided by the SSBF.

Although a large percentage of minority firms that applied for loans were rejected even more might
have been rejected if they had applied. Of course, it is impossible to measure how these firms would have
been treated in they applied for loans. Instead, the SSBF provides related information on whether the firm
did not apply for credit when it needed it because the firm thought that the application would be turned
down (i.e. fear of rejection). Estimates reported in Table 9 indicate that minority firms are more likely to not
apply for loans because of a fear of being rejected than non-minority firms. For high sales firms, minority
firms are much more likely to not apply for loans because of a fear of rejection than non-minority firms.

Previous studies have also found that minority firms tend to pay higher interest rates on business
loans than do non-minority firms.” We find similar evidence for minority firms. For all firms, minority firms
pay 7. 8 percent on average for loans compared with 6. 4 percent for non-minority firms. The difference is
smaller, but still exists for high sales firms.

Blanchflower, I..evine and Zimmerman. Cavalluzzo, Cavaltuso £md Wolken.

Overall, minority firms are more likely to be denied when applying for loans and are less likely to apply
for loans because of a fear of rejection. When these firms do receive loans they are for smaller amounts
and for higher interest rates than non-minority firms. These alarming differences in treatment in the lending
market, however, may be due to differences in the size, creditworthiness and other characteristics of the
owners and firms. This does not appear to be the case, however, as previous studies control for numerous
owner and firm characteristics including the creditworthiness of the firm. We conduct a similar analysis
including an even more extensive set of controls and continue to find that minority firms are more likely to
experience loan denials, not apply for loans because of fear of rejection, and pay higher interest rates on
loans. Any remaining negative racial or gender differences in lending outcomes are consistent with the
existence of lending discrimination.®^

Regression Analysis of Equity Investment and Loan Amounts

In this section we conduct a regression analysis to further investigate differences in equity investment
and loan amounts between minority and non-minority businesses. We estimate several regressions using
log equity investments and log loan amounts as the dependent variables. The main owner controls include
female, education, age and experience, the main geographic controls include region and urbanicity, and
the main business controls include number of owners, whether the business was purchased or inherited,
firm age, legal form and Industry. We also include log sales which controls for current and recent business
performance. To control for the owner’s creditworthiness we include whether the owner owns a home,
home equity, and personal credit scores. Finally, to control for firm creditworthiness we include whether the
firm filed for bankruptcy in the past. These represent detailed measures of what lenders and investors look
for in making decisions about providing financial capital to firms.

Table 10 reports regression estimates for log equity investments and loan amounts for all firms and
high sales firms. Results for log equity investments are discussed first. After controlling for detailed
owner and business characteristics we find lower levels of equity investments in minority firms compared
to non-minority firms, but the difference is not statistically significant. The education level of the owner
and experience is strongly associated with receiving equity capital. Having more business owners also
increases the amount of new equity investments in the firm. The sales level does not predict equity
investments in the firm. This may be due to the fact that successful firms do not need as much in new
equity as less successful firms, but less successful firms have more difficulty attracting new equity
investments. In the end, the potentially offsetting factors may result in a flat relationship between business
performance and new equity investments. Higher credit scores are associated with lower levels of equity
investments which might partly reflect less need. We also estimate a regression including only firms with
$500,000 or more in annual sales. The results are fairly similar.

Ibid.. 36

Table 10

Linear Regressions for Log Egtaty Investments and Loan Amounts
Survey of Smdl Busmess Finances (2003)

Specification

Log Ecpty Investments

Log Loan Amount

(1)

(2)

(3)

!il

Sample

All Firms

Hi-Sales

All Firms

Hi-Sales

Minority

-0.0916

-0.1616

-0.3499

-0.8365

(0.0564)

(0.1053)

(0.1273)

(0.2356)

Female

-0.0689

-0.0397

-0.0965

-0.0071

(0.0423)

(0.0793)

(0.0955)

(0.1775)

High school graduate

0.0305

0.1101

-0.9618

-0.6670

(0.1506)

(0.2743)

(0.3401)

(0.6136)

Some college

0.1061

0.1239

-0.8729

-0.5122

(0.1484)

(0.2699)

(0.3351)

(0.6037)

College

0.2942

0.2436

-0.9013

-0.4303

(0.1500)

(0.2733)

(0.3388)

(0.6113)

Graduate school

0.3066

0.3538

-0.8277

-0.3871

(0.1522)

(0.2790)

(0.3437)

(0.6240)

Age

-0.0073

0.0010

-0.0138

-0.0231

(0.0024)

(0.0048)

(0.0055)

(0.0108)

Experience

0.0079

0.0008

-0.0068

-0.0051

(0.0028)

(0.0052)

(0.0062)

(0.0115)

Number of owners

0.0606

0.0533

0.1049

0.0334

(0.0120)

(0.0122)

(0.0271)

(0.0273)

Firm age

-0.0021

-0.0010

0.0103

0.0073

(0.0026)

(0.0042)

(0.0058)

(0.0095)

Log sales

-0.0092

0.0173

0.5409

1 .3669

(0.0119)

(0.0392)

(0.0268)

(0.0877)

Log home equity

-0.0044

-0.0560

0,0080

-0.0663

(0.0109)

(0.0210)

(0.0247)

(0.0470)

D&B credit score: 11-25

-0.1988

-0.3226

0.1070

0,3967

(0.0847)

(0.1508)

(0.1913)

(0.3374)

D&B credit score: 26-50

-0.2667

-0.1648

0.2649

0.5181

(0.0799)

(0.1419)

(0.1805)

(0.3174)

D&B credit score: 51-75

-0.3684

-0.3061

0.1353

0.4900

(0.0773)

(0.1245)

(0.1745)

(0.2785)

D&B credit score: 78-90

-0.3502

-0.3519

0.1293

0.2503

(0.0820)

(0.1312)

(0.1851)

(0.2935)

D&B credit score: 91-100

-0.3848

-0.2673

0.1829

0.2373

(0.0927)

(0.1403)

(0.2094)

(0.3138)

Legal form of organization

Yes

Industry

Yes

Region and urban

Yes

Mean of dependent variable

4.9640

5.0545

7.5048

9.4940

Samt^e size

4,240

2.116

2,516

2,116

Notes (1 ) OLS coefficient estimates and ttieir standard errors (in parentheses) are reported.
(2) Ail estimates use sample weights provided by the SSBF.

What are the determinants of loan amounts? Specifications 3 and 4 in Table 1 0 report estimates.
Minority firms receive smaller loan amounts than non-minority firms even after controlling for detailed
business and owner characteristics. The differences are large and statistically significant. Among all
firms, minority businesses have loan amounts that are 35 percent lower than for non-minority firms. The
difference is even larger when focusing on loans r^eived by high sales firms.

In addition to race, the number of owners and sales increase loan amounts. Although having more
sales may reduce the need for loans it may have a much larger effect on the ability to obtain business
loans. Also, higher credit scores are generally linked to the ability to obtain larger loans.

Decomposition Estimates

The regression analysis identifies several potential barriers to financing among minority businesses.
For example, high credit scores are found to be an important determinant of obtaining business loans,
if minority firms have low credit scores on average then this could limit their ability to obtain business
loans. Lower sales levels among minority businesses may also limit their potential to obtain loans. The
impact of each factor, however, is difficult to estimate. In particular, we want to estimate the contribution of
differences between minority and non-minority firms in credit scores, sales, and other owner and business
characteristics to the racial gaps in obtaining financing.

To explore the questions stated above further, we decompose inter-group differences in a dependent
variable into those due to different observable characteristics across groups (sometime referred to as the
endowment effect) and those due to different “prices" of characteristics of groups.®® The Blinder-Oaxaca
decomposition of the non-minority/minority gap in the average value of the dependent variable, Y, can be
expressed as;

Similar to most recent studies applying the decomposition technique, we focus on estimating
the first component of the decomposition that captures contributions from differences in observable
characteristics or “endowments.” We do not report estimates for the second or ’’unexplained" component
of the decomposition because it partly captures contributions from group differences in unmeasurable
characteristics and is sensitive to the choice of left-out categories making the results difficult to interpret.
We also weight the first term of the decomposition expression using coefficient estimates from a pooled
sample of all groups.®® The regression estimates are taken from Table 10. The contribution from racial
differences in the characteristics can thus be written as:

(2) (T-T)p-

Where are means of firm characteristics of race j, is a vector of pooled coefficient estimates,

and j-W or M for non-minority (non-Hispanic white) or minority, respectively. Equation (2) provides an
estimate of the contribution of racial differences In the entire set of independent variables to the racial gap.
Separate calculations are made to identify the contribution of group differences in specific variables to the gap.

’’^Aian S. Blinder, “Wage Discrimination: Reduced Fonn and Structural Journal of Human Resources. 8. no. 4 (1973): 436-455.

Ronald Oaxaca, “Male-Female Wage Differentials in Urban Labor Markets ” /nfe-mor/ona/ Economic Revietv, 14, no. 3 (1973): 693-709.
'"’Ronald Oaxaca and Michael Ransom. “On Discrimination and the Decomposition of Wage Differentials,’' Journal of Econometrics, 61, no. 1

(1994): 5-21.

Table 1 1 reports estimates from this procedure for decomposing the non-minorlty/mlnority gaps in
levels of equity investments and loan amounts discussed above. The separate contributions from racial
differences in each set of independent variables are reported. We focus on the main explanatory factors.
Minority firms have a lower level of equity financir^g by 3.6 tog points (or roughly 3.6 percent). The only
factor contributing to the difference in log equity investments is experience. Minority business owners
have less experience than non-minority business owners (16 years compared with 20 years of experience,
respectively). The tower level of experience explains 3.0 percentage points of the 3.6 percentage point
difference in tog equity investments. This is a small contribution, however. Overall, the differences in log
equity investments between minority and non-minority firms are not large and there are no factors that
contribute strongly to the difference. Interestingly, differences In sales, home equity, credit scores, legal
forms, and industries do not contribute to minority/non-minority differences in equity financing. When we
focus on only high sales firms we find similar results (reported in Specification 2).

Table 11

Decompositions for Log Equity Investments and Loan Amounts
Survey of Small Business Finances (2003)

Specification

Log Equity Investments

Log Loan Amount

(1)

(2)

(3)

Sample

All Firms

Hi-S^es

All Firms

Hi-Sales

Non-minority mean of dep var

4.9084

5,0064

6,6563

8.3738

Minority mean of dep. var

4.8722

4.9656

6,0736

7.5482

Non-min/min.difference

0.0362

0.0408

0.5827

0.8256

Female

0.0020

0.0013

0.0028

0.0002

Education

-0.0083

-0.0428

-0.0131

-0.0241

Age

-0.0241

0.0032

-0.0454

-0.0746

Experience

0.0297

0.0036

-0.0256

-0.0227

Number of owners

0.0000

0.0059

0.0000

0.0037

Firm age

-0.0075

-0.0050

0.0361

0.0347

Log sales

-0.0027

-0.0016

0.1600

•0.1226

Log home equity

-0.0031

•0.0154

0.0057

-0,0183

Credit scores

•0.0338

-0.0301

0.0084

0.0155

Legal form of organization

-0.0042

-0.0408

-0.0066

-0.0064

Indusfry

-0.0062

-0.0008

0.0228

0.1150

Region and urban

0.0000

-0.0186

0.0897

0.1156

Total explained

-0.0583

-0.1411

0,2349

0.0159

Notes; (1 ) See text for more details on decc»nposilions.

(2) Coefficient estimates used in decomposition are reported in Table 10.

The minority/non-minority gap in financing is much larger for loan amounts. For all firms, we find a
58 tog point difference between minority and non-minority loan amounts. A large part of the difference can
be explained by minority/non-mlnority differences in tog sales. Minority firms have sales levels that are
30 percent tower than non-minority firms, and this difference translates into a loan amount gap of 16 log
points. Thus, roughly 1 6 percentage points of the gap In loan amounts is due to lower sales levels among
minority firms, potentially limiting their ability to obtain bank loans.

Geographical differences also provide a large contribution to why minority firms obtain lower loan
amounts (9.0 log points). Minority firms have a less favorable regional distribution in the country and are
more likely to be located in urban areas, which have lower loan amounts all else equal. Surprisingly, credit
scores are not a major factor only explaining a small amount of the differences in loan amounts.

If we focus on high sales firms, we find that industry and geographical differences are the two most
important explanations for why high sales minority firms have roughly 80 percent lower levels of bank loans
than high sales non-minority firms. Geographical differences explain 12 percentage points of the difference
in loan amounts. Industry differences explain a similar amount of the difference. Minority firms are less
concentrated in construction and manufacturing which tend to have higher loan amounts, and are more
concentrated in retail trade, which tend to have lower loan amounts.

Overall, minority firms have lower equity investments and loan amounts than non-minority firms.
Having less experience, tower sales, and less fevorable geographical and industry distributions partially
limit their ability to raise financial capital. On the other hand, business owner’s education, home equity
and credit scores do not appear to represent major barriers to raising either equity financing or loans for
the larger, more established businesses represented in the SSBF. The findings for newly formed minority
businesses may differ, however. We investigate this question next using data from the KFS.

Capital Use among Newly-Formed Minority Firms

The KFS provides information on businesses formed in 2004 and follows these new business
ventures annually through 2007. The KFS, which only recently became available, provides the first
evidence on the financing patterns of young minority firms. It is useful to examine disparities in financing
at the early stages of firm growth to understand the life cycle of minority firms and how they compare to
non-minority firms. The KFS also provides the latest microdata on financing of minority businesses with
estimates from 2007. Another major advantage of the KFS is that it provides a more accurate measure
of sources and amounts of startup capital than commonly used data sources such as the CBO and SBO
because the information is gathered in the first year of operations not retrospectively which for some firms
could be 20 or more years ago.

Table 12 reports estimates for the percentage of minority and non-minority firms that use each source
of financing, as well as the amounts of startup and subsequent capital by source. The sources of financing
are aggregated Into three broad categories: 1) internal financing (debt and equity financing by the owner(s)
and insiders (friends and family). 2) external debt financing (bank loans, credit lines, credit cards, etc.), and
3) external equity financing (venture capital, angel financing, etc.). Estimates are for both start up capital
(capital injections in 2004, the first year of operations) and for subsequent new financial injections (annual
average based on 2005-2007). All dollar figures are reported in 2007 dollars.

’’Andrew B, Bernard ^d Matthew J. Slaughter, The Life Cycle of a Minority-Ovined Business: Implications far the American Economy
(Washington: Minority Business Development Agency, 2004).

Table 12

Sources of Startup and Subsequ^t Coital for New Business Ventures
Kauffman Firm Survey (2004-07) (2007 Dollars)

Total

Internal Financing External D^t External Equity Financial Capital

Group % of firms Mean % of firms Mean % of firms Mean Mean

Startup capital (2004)

Non-minority

86.7%

46,007

38.1%

$ 36,777

4.7%

$7,607

$90,

,391

Minority

87.8%

41,154

33.6%

$ 29,879

3.5%

$2,984

$74,

,017

Subsequent capital

(2005-2007)

Non-minority

65.3%

16,180

51.8%

$ 25,365

5.4%

$4,082

$45,

.627

Minority

68.4%

13,604

48.2%

$13,783

6.7%

$2,059

$29.

,447

All estimates use survey weights provided by the KFS.

in the first year of operations, minority-owned firms invested nearly $75,000 into their businesses,
while non-minorities invested more than $90,000. Internal financing was the most frequently used source
of financing, with more than 85 percent of firms using internal financing for start up capital. It was also the
largest source of capital for both groups, making up nearly 51 percent of non-minority start up financing
and more than 55 percent of minority-owned business start up financing. Disparities between minority and
non-minority firms were larger for external debt and especially external equity. Minority firms averaged
$29,879 in external debt compared with $36,777 for non-minority firms. Minority firms had the most trouble
obtaining external equity with $2,984 on average equity compared with $7,607 on average for non-minority
firms. Very few firms used this type of financing though— Just 4.7 percent of non-minority firms and 3.5
percent of minority-owned firms.

In terms of levels of subsequent financial injections, non-minority businesses continued to make larger
capital investments. Non-minority businesses invested an average of $45,000 annually into their firms,
while minority-owned firms invested less than $30,000 on average. This represents a key new finding
provided by the KFS: disparities in access to financial capital do not become smaller after startup, but
instead grow in the years just after startup. The minority/non-minority disparity in financial capital is much
larger In percentage terms for the 2005-07 period than the 2004 year.

Subsequent financial injections displayed different patterns in terms of financing sources, most
notably that internal financing dropped in importance. Although it was still the most common source used,
only 65.3 percent of non-minority firms used internal financing and 68,4 percent of minority-owned firms.

For non-minority firms, this source made up just over one third of their new financial Injections, while for
minorities it was closer to one half (46,2 percent). Young minority business owners are more reliant on
using their own or family money to finance operations in the years just following startup than non-minority
owners.

Minority and non-minority firms increased their use of external debt financing for subsequent capital
injections. More than half of non-minority firms (51.8 percent) and nearly half of minority firms (48.2
percent) used external debt financing for subsequent financial injections. As a percentage of the total
invested, external debt financing became the most important source of financing, making up more than 55
percent of non-minority business financing and nearly 47 percent of minority business financing. External
equity continued to be the least Important source, making up 9 percent of non-minority business financing
and 7 percent of minority business financing. A slightly larger share of minority-owned firms used this
source (6.7 percent), compared with non-minority firms (5.4 percent), but the average level of investment
was half the amount used by non-minority firms.

Multivariate regressions on the log levels of start up capital are presented in Table 13 . Even after
controlling for numerous owner and firm characteristics, including two-digit industry and credit score,
minority-owned businesses were still more likely to have signi^cantly lower levels of external debt financing
and external equity financing. These differences v^ere staUstically significant. The coefficient on the
minority variable was also negative in the internal financing equation, but it was not statistically significant.
The coefficient on female was negative and statistically significant in all three models. Owner age,
education, start up experience, and hours worthed wrere posifively correlated with the levels of financing,
while the owner’s previous industry experience was negatively correlated. As far as firm characteristics,
incorporation was positively associated with the levels of financing, while being home based was negatively
associated with levels of financing. Levels of innovation, as measured by comparative advantage and
intellectual property were mixed. Finally, having a high credit score was positively correlated with levels
of financing and statistically significant in the external debt model, while having a low credit score was
negatively associated with all three levels of financing and statistically significant in the internal and
external debt financing models. The owner’s credit rating is important for obtaining startup financing
especially for external debt.

TaUe13

Linear Regressbns for Startup Capital
Kauffm^ Frm (2004)

Coefficients

U>gof2004

trtemal

Finandm

Log of 2004
External
OebtFinat%ina

Log of 2004
Externai

Eauitv Finandna

Minority

-0.0547

(0.0797)

-0.27B*"

<0.0965)

-0.0746*

(0.03^)

Female

-a 161**

(0.075Q

-0.168*

(0.0889)

-0.133***

(0-0337)

Age

0.0338*

(0.019^

0.0515"

(0.0231)

0.0244**

(0.00969)

Age Squared

-Q.00<G07

(0.00(»0$

-0.000427*

(0.000248)

-0.000232”

(0.000102)

HS Graduate

0.266

(0.262)

0.130

(0.292)

0.0210

(0.101)

Some College

0.333

(0.248)

0.0928

(0.278)

0.0958

(0.0985)

Cdlege Graduate

0.481*

(0.252)

0.0818

(0.282)

0-0907

(0.101)

Graduate Degree

0.556”

(0.259)

02131

(0292)

0.143

(0.106)

Hours Worked

0.0211"*

0.00945”'

0.00115

(weekly average)

(0.00150)

(0.00175)

(0.000784)

Industry Experience

-0.0128"*

-0.0139***

-0.000499

(years)

(0.00350)

(0.00436)

(0.00218)

Start up Experience

0.0528

(0.0677)

0.0639

(0.0807)

0.0307

(0.0380)

Team Ownership

0.320’*'

(0.0885)

0278**

(0.110)

0.0878

(0.0608)

Partnership

0.177

(0.171)

-0.155

(0.197)

0,159

(0.116)

Limited Liability Corp.

0.500***

(0.0925)

0.446*"

(0.106)

0.197"*

(0.0494)

Corporation

0.446'**

(0.0946)

0.369*"

(0.112)

0.195”*

(0,0502)

Home Based

-0.675—

(0.0732)

-0.536*"

(0.0846)

-0.152"*

(0.0396)

Comparative Adv.

0.146”

(0.0701)

0-0555

(0.0825)

-0,0574

(0.0401)

Intellectual Property

0.178"

(0.0851)

-0.0122

(0.101)

0,117"

(0.0547)

High Credit Score

0,111

(0.122)

0.447*”

(0.152)

0.0169

(0.0741)

Low Credit Score

-0.25r**

(0.0724)

-0.303*"

(0.0836)

-0.0242

(0.0403)

Constant

7.155***

(0.608)

6286*"

(0.720)

5.826"*

(0.344)

Observations

3806

R-squared

0.234

0.122

0,051

Robust standard errors in parentheses

p<0.01 , ** p<0.06. *p<0.1

2-digit industry dummies included

The decomposition exercise was repeated for average financial injections over the 2005-2007 period,
with the addition of sales as a control variable. Results are presented in Table 14. In these models the
minority coefficient was positive in all three cases, but only statistically significant in the internal financing
model. The finding indicates that the disparities presented in Table 12 disappear after controlling for other
factors. The coefficient on female was again negative and statistically significant in all three models. The
coefficients on the sales dummies were positive and usually statistically significant in all three models,
indicating a positive correlation between size and level of financing. Owner age and education were
generally no longer significant predictors, while hours worked continued to be positive and strongly
significant in all three models. Credit scores continued to be an important determinant of the amount of
financial capital obtained by the firm although the effects appear to be smaller than for startup capital. A
strong determinant of subsequent capital investments for most types of financing are the sales level of the
firm. Higher sales levels in the early stages of firm growth increased the amount of financing used in the firm.

Table 14

Linev Regressions for Subsetfuent CapHel
Kauffoian Fvm Surv^ (2005-07)

Coefficients

Log at
bitemal
Fstancina

Log of
External

Debt Fmancho

Log of
External
FniilvFInancina

Minority

0.278*~

ffi.OTBO)

0.0125

p.0807)

0.0283

(0.0377)

Female

-a201—

(0.0721)

-OJ242"’

(0.0782)

-0.0997"’

(0.0318)

Age

-Oj00465

(0.0186)

0.0401"

(0.0192)

-0-00729

(0.00836)

Age Squared

0.000150

(0.000198)

-0.000329

(0.000204)

0-000129

(0.0000918)

HS Graduate

0.0596

(0.242)

'0.0992

(0.237)

-0.114

(0.0791)

Some College

0.113

(0.231)

0.0206

(0.223)

-0,00951

(0.0791)

Colege Graduate

0.0701

(0.a4)

-0.107

(0.226)

0.0462

(0.0831)

Graduate Degree

0.198

(0.242)

-0.138

(0.235)

0.112

(0.0904)

Hours Worked

0.00948'“*

0.00553*"

0-00155"

(weekly average)

ff).00t49)

(0.00158)

(0.000791)

Industry Expeitence

-0.00405

.0.0112’"

0.000311

(years)

0).OO33O)

(0.09362)

(0,00180)

Startup Experience

0.256’"

(0.0638)

0.0«9

(0.0691)

0.0390

(0.0321)

Team Owners!^

0.120

(0.0917)

0.153’"

(0,0489)

Partnership

0.0393

(0.155)

-0391"

(0.153)

-0.0493

(0.0718)

Limited Liability Corp.

0,0775

(0.0862)

0.186’

(0.0951)

0,0623

(0.0397)

Corporation

0.0626

(0.0923)

0.228"

(0.0996)

0,0983"*

(0,0375)

Home Based

•0.217’"

(0.0705)

•0.0877

(0.0755)

-0,0326

(0.0366)

Comptk' alive Adv.

•0106

(0.0649)

•0.0805

(0.0710)

0.0309

(0.0287)

Intellectual Property

0.402"’

(0.0828)

0.145*

(0.0881)

0,214”’

(0.0511)

High Cretft Score

0.168

(0.117)

0.348*"

(0.123)

0.0462

(0.0684)

Lowered# Sewe

-0.137"

(0.0683)

-0.160"

(0,0737)

0.0203

(0.0305)

Sales <$50-$18.000)

0.859’"

(0.0835)

0.439"*

(0.0838)

0.0436

(0,0346)

Sales {$l8.001-$52.000)

1.203’"

(0.0911)

1.028*"

(0.0947)

0.0271

(0.0376)

Sales ($52.001-$121,00C9

1.509’"

(0.102)

1.633’"

(0.108)

0.0287

(0.0422)

Sates ($121,0(X)-*)

1.544*"

(0.114)

2.301”*

(0,118)

0,207“’’

(0,0606)

Constant

6.766*"

(0.S69)

6.302*"

(0.576)

6.248"*

(0.307)

Observations

3806

R-squared

0.203

0.264

0.077

Robus! stanbafo errcrs in parentheses
•"•p<0.01. " p<O.0S, ' p<0.1
2-diglt indusSy disnmies incfoped

We now turn to explaining differences in financing between minority and non-minority firms. The
decomposition exercise described earlier was repeated with the KFS data. Results are presented in Table
1 5. Very little of the differences in start up capital are explained by racial differences in owner and firm
characteristics, including credit scores. The owner’s age provides the largest contributions to the gaps in
internal financing and external debt at roughly 4 percentage points. This may partly capture the effects of
owner’s wealth on access to internal financing and use as collateral for obtaining loans. Minority owners
tend to be younger and may have less personal wealth. Credit scores only explain a small amount of the
gap in startup capital.

Table 15

Decompositions for Logs of Startup and Subsequent Capital
Kaufftnan Film Survey (2004-07)

Specification

Startup Capital S ubseq uent Capital

Internal

Financing

(1)

External Debt
(2)

External

Equity

(3)

internal

Financing

(4)

External Debt

(5)

External

Equity

(6)

Non-minority mean of dep var

9.2300

7.6700

6.4400

7.9900

7.8700

6.4000

Minority mean of dep. var

9.1600

7.3700

6.3400

8.0600

7.6100

6.4000

Non-min/min. difference

0.0700

0.3000

0.1000

-0.0700

0.2600

0.0000

Female

0.0016

0.0017

0.0013

0,0020

0.0024

0.0010

Owner Education

0.0089

0.0029

-0.0015

-0.0014

-0,0076

■0.0051

Owner Age

0.0455

0.0382

0.0098

0.0277

0.0307

0.0304

Indu^ry and Start Up Experience

-0.0169

-0.0186

0.0013

0.0114

-0.0136

0,0032

Team Ownership

0,0032

0.0028

0.0009

0,0007

0.0012

0.0015

Legal form of organization

0.0105

0.0097

0.0040

0.0017

0.0033

0.0009

Comparative Adv& InteHectual Prop.

0.0088

0.0033

-0,0034

-0.0064

-0.0048

0.0019

Home Based

-0.0135

-0.0107

-0.0030

-0.0043

-0.0018

-0.0007

Credit scores

0.0176

0,0271

0.0018

0.0116

0.0166

■0,0003

Hours Worked (week)

-0,0639

-0.0286

-0.0035

-0.0287

-0,0168

-0.0047

Industry

-0.0079

-0.0180

0.0070

0.0073

0.0075

0.0090

Sales

n/a

0,1715

0.2256

0.0137

Total exolatned

-0.0061

0.0098

0.0146

0.1930

0.2427

0.0509

Notes (1) See text for more details on decompositions.

About a quarter of the differences in subsequent financial injections of external debt are explained by
differences in sales. Surprisingly, only about two percent is explained by differences in credit scores. Just
under 20 percent of the differences in internal financing injections after start up are explained. Again, the
majority is explained by differences in sales. Only about five percent of the differences in external equity
injections are explained. Sales only accounted for about one percentage point of the five percentage point
difference.

The Employment Returns to Financing

A stated goal of the U.S. Small Business Administration (SBA) Certified Development Company/504
guaranteed lending program is to create or retain one job for each $50,000 provided by the SBA.®® Small
manufacturers have a $100,000 job creation or retention goal, and in the 2009 stimulus package the goal
for the SBA program has been Increased to $65,000 per job. A similar calculation can be made from
the overall amount spent on the President’s stimulus package. The total amount spent on the stimulus
package is $789.5 billion with the goal of creating 3.5 million jobs. This translates into $225,000 of stimulus
funds for each job created in the United States.

U.S Small Business Administration, CDC/504 Program (accessed My 2009); available from htlp:/Av\vw. sba.gov/ftnancialassistance/
prospective!enders/cdc504/index.hlm!,

The SBA also provides information on the number of jobs created and retained from firms receiving
funding from its 7(a) and 504 programs. As Table 16 indicates, the 7(a) program provides $18,000 in loans
for every job created or retained by participant businesses. The 504 program provides $42,000 in funds for
each job.

Table 16

Job Creation through Small Business Administration Loan Programs (2005-08)

FY 2005

FY 2006

FY 2007

FY 2008

SBA 7(a) Program

Total amount of loans ($000s)

Jobs created

Jobs retained

Investment per job created or retained

$13,998,331

155,821

506,312

$21,141

$13,447,225

206,608

583,562

$17,018

$13,211,731

265,095

599,852

$15,275

$11,675,399

200,081

449,190

$17,982

SBA 504 Program

Total amount of loans ($000s)

Jobs created

Jobs retained

Investment per iob created or retained

$4,942,067

85,540

49,482

$36,602

$5,610,828

89,601

45,878

$41,415

$6,176,210

97,280

43,498

$43,872

$5,117,079

79,274

42,449

$42,039

Source: U.S. Small Business Administration (2009)

Are these estimates in line with the amount of financing firms use and their resulting job creation?

The data demands for such a calculation are great. A measure of each firm's investments through equity
financing or loans over time is needed as well as a measure of the net number of jobs created over the
same time period. Unfortunately, this level of detailed data is not readily available. There is one exception
and that Is for new firms that are measured in the KFS. Because the KFS captures firms from their initial
startup to several years out, and records annual investment amounts from all sources, we can estimate the
total amount invested in these young firms. We can also examine total net employment created by the firm
In the last year of the survey. The main disadvantage of this approach is that it may understate the total
employment returns to financing because it only measures employment four years after business inception.
Firms starting in 2004 are followed through 2007 in the KFS. The return to financial investments at the
earlier stages of firm growth may take longer to be realized.

Estimates from the KFS indicate that the average young firm invests $214,338 over the first four
years of existence (see Table 17). The average firm by the end of this period has created 2.5 net new jobs.
Thus, the average investment per created job for young firms is $85,055. Focusing on young minority
firms, we find an investment of $52,374 per job. The non-minority average investment per job is $95,492.

Table 17

Financing per Job Created among Young Firms
Kauffman Firm Survey (2004-07)

Total

Financing

2004-2007

Employment
Creation by
2007

Financing
per Job

Minority

$162,358

3.1

$52,374

Non-Minority

$227,272

2.4

$95,492

Total

$214,338

2.5

$85,055

Source: Kauffman Firm Survey 2004-07.

Employment measures after only four yeare since business inception are likely to underestimate
longer-term employment creation because of the short time frame. Longer-term job creation would result
in a smaller level of financing per job than the estimates from the KFS sample of young firms. Although
understated, the estimates from the KFS are in the same broad range as the new SBA goal of $65,000 per
job created or retained.

It is important to note that this measure of the employment returns to financing does not represent
the causal effects of financing on employment. Finns that receive substantial amounts of financing, for
example, may have created a large number of jobs without these ftjnds or with fewer funds. And, firms that
have only obtained small amounts of financing may not have created a large number of jobs even if they
had obtained substantially more financing. With these concerns in mind, the calculations here provide only
an approximation to actual levels and some care is required In interpreting these results as the required
amount of financing needed to create a job.

Table 17 also indicates that young minority-owned firms created jobs at similar rates than young non-
minority firms. As discussed before, 2002 Census data showed that minority firms also paid similar wages
compared to non-minority firms. According to the Bureau of Labor Statistics, the national unemployment
rate reached 9.8 percent in September of 2009, and the unemployment rate of African Americans is even
higher at 1 5.4 percent, followed by that of Hispanics at 1 2.7 percent. Greater capital access for minority-
owned firms is essential to sustain their growth, reduce national unemployment levels, and in particular the
high rate of unemployment in minority communities.

Conclusions

Minority business enterprises (MBEs) contribute substantially to the U.S. economy. The number of
minority firms, their gross receipts, employment and payrolls are growing at a faster rate than for non-
minority firms.

Moreover, young minority-owned firms created Jobs at similar rates than young non-minority firms.
Minority-owned firms are a critical component to reducing the national unemployment rate, especially the
elevated unemployment in minority communities.

Inadequate access to financial capital is found to be a particularly important constraint limiting the
growth of minority-owned businesses. Estimates generated for this report provide extensive evidence of
the difficulties in obtaining financial capital among minority-owned businesses.

The current economic climate is only making the situation worse. All recent indicators of personal
wealth and access to financial capital point to worsening conditions for entrepreneurs. Bankruptcy filings
have increased dramatically over the past year and are likely to continue.

It is vital to the short-term survival and long-term success of MBEs that we aggressively address the
liquidity constraints created by the current financial crisis. The resulting loss of MBEs will be very harmful
for job creation, innovation, economic parity, and productivity in the country. There is a sizeable loss of
efficiency in the overall U.S. economy imposed by the financing constraints faced by MBEs because of the
large and growing share of all businesses owned by minorities. Barriers to ensuring access to capital and
thus growth to any of the diverse sets of groups of businesses in the country limit total U.S. productivity in
addition to contributing to economic inequality.

.51

Bibliography

Allen, W. David. “Social Networks and Self-Employment.” Jooma/ of Soc/o-Econom/cs 29, no. 5 (2000): 487-501.

American Express. "Entrepreneurs Say Managing Throi^ Recession Makes Them Sharper Business Owners,
According To The American Express® Open Small Business Monitor. 2009. Accessed October 2009. Available
from http://home3.americanexpress.com/corp/pc/2009/rrtr,asp.

Astebro, Thomas and Irwin Bernhardt. "Start-Up Financing, Owner Characteristics and Survival.” Journal of
Economics and Business 55, no. 4 (2003): 303-320.

Avery, Robert B., Raphael W. Bostic, and Katherine A. Samolyk. “The Role of Personal Wealth in Small Business
Fmance.” Journal of Banking and Finance 22, no. 6 (1998): 1019-1061.

Bates, Timothy. Banking on Black Enteiprise. Washington, D.C.: Joint Center for PoliUcal and Economic Studies,

1993.

Bates, Timothy. Race, Self-Employment & Upward Mobility: An Illusive American Dream. Washington, D.C.:
Woodrow Wilson Center Press and Baltimore: John Hopkins University Press, 1997.

Bates, Timothy. “Financing Disadvantaged Firms." Credit Markets for the Poor. Eds. Bolton, Patrick and Howard
Rosenthal. New York: Russell Sage Foundation, 2005.

Bates, Timothy, and William D. Bradford. “Venture-Capital Investment in Minority Business.” Journal of Money
Credit and Banking 40. no. 2-3 (2008): 489-504.

Bates, Timothy, and David Howell. “The Declining Status of African American Men in the New York City
Construction Industry.” In Race. Markets, and Social Oirfcomes, eds. Patrick Mason and Rhonda Williams.
Boston: Kluwer, 1997.

Becker, G. The Economics of Discrimination. 2nd ed. Chicago: University of Chicago Press, 1971.

Bernard, Andrew B., and Matthew J. Slaughter. The Life Cycle of a Minority-Owned Business: Implications for
the American Economy. Paper Prepared for National Minority Enterprise Development Week 2004 Conference
September 7-10, 2004. Washington, D.C.: Minority Business Development Agency, 2004.

Black, Jane, David de Meza, and David Jeffreys. "House Prices, The Supply of Collateral and the Enterprise
Economy.” The Economic Journal 106. no. 434 (1996): 60-75.

Blanchard, Lloyd, John Yinger and Bo Zhao. “Do Credit Market Barriers Exist for Minority and Women
Entrepreneurs?” Syracuse University Working Paper, 2004.

Blanchflower, David G. "Entrepreneurehip in the United States," IZA Working Paper No. 3130 (2007).

Bianchflower, David G., P. Levine and D. Zimmerman. “Discrimination in the Small Business Credit Market.”
Review of Economics and Statistics 85, no. 4 (2003): 930-943.

Blanchflower, David G. and Andrew J. Oswald. “Wiat Makes and Entrepreneur?” Journal of Labor Economics
16, no.1 (1998): 26-60.

Blinder, Alan S. “W&ge Discrimination: Reduced Form and Structural Variables." Journal of Human Resources 8,
no. 4 (1973): 436-455.

Board of Governors of the Federal Reser\« System. The January 2009 Senior Loan Officer Opinion Survey on
Bank Lending Practices, 2009. Accessed July 2009. Available from http://www.federalreserve.gov/boarddocs/
SnLoanSurvey/200902/default.htm.

Borjas, George, and Stephen Bronars. "Consumer DiscrimlnatkMi and Self-Emptoyment." Journal of Pditica!
EconomyQl, no. 3 (1989): 581-605.

Bostic, R. and K.R Lampani. “Racial Differences In Patterns of Small Business Finance: The Importance of Local
Geography.” Working Paper, 1999.

Boston, Thomas D. “Generating Jobs Through African American Business Development." In Readings in Black
Political Economy, eds. J. Whitehead and C. Harris. Dubuque: Kendall-Hunt, 1999.

Boston, Thomas D. ‘The ING Gazelle Index.” Aa^essed July 2009. Available from www.inggazelleindex.com.

Boston, Thomas D. “The Role of Black-Owned Businesses in Black Community Development." Jobs and
Economic Development in Minority Communities: Realities, Challenges, and Innovation, eds. Paul Ong and
Anastasia Loukaitou-Sideris. Temple University Press, 2006.

Bradford, Wiliam D. "The Wealth Dynamics of Entrepreneurship for Black and White Families in the U.S."
Review of Income and Wealth 49, no.1 (2003): 89-116.

Board of Governors of the Federal Reserve System. “Recent Changes in U.S. Family Finances: Evidence from
the 2001 and 2004 Survey of Consumer Finances.” Fectera/Resen^e Bulletin, Brian K. Bucks, Brian K., Arthur B.
Kennickell, and Kevin B. Moore. Washington, D.C.: Board of Governors of the Federal Reserve System, 2006.

Cavalluzzo, Ken, Linda Cavalluzzo, and John Wolken. "Competition, Small Business Financing, and
Discrimination: Evidence from a New Sun/ey.” Journal ofBusiriess 75, no. 4 (2002); 641-679.

Cavalluzzo, Ken and John Wolken. “Small Business Loan Turndowns, Personal Wealth and Discrimination."
Journal of BusinesslS, no 6 (2005): 2153-2177.

Coleman, Susan. ‘The Borrowing Experience of Blad< and Hispanic-Owned Small Firms: Evidence from the
1998 Survey of Small Business Finances.” The Academy of Entrepreneurship Journal Q, no. 1 (2002): 1-20.

Coleman. Susan. “Borrowing Patterns for Small Firms: A Comparison by Race and Ethnicity." The Journal of
Entrepreneurial Finance & Business Ventures 7, no. 3 (2003): 87-1 08.

Dunn, Thomas A. and Douglas J. Holtz-Eakin. “Financial Capital, Human Capital, and the Transition to Self-
Employment: Evidence from Intergenerational Links.” Journal of Labor Economics 1 8, no. 2 (2000): 282-305.

Earle, John S. and Zuzana Sakova. “Business Start-Ups cw Disguised Unemployn^nt? Evidence on the
Character of Self-Employment from Transition Econanies.” Labour Economics 7. no. 5 (2000): 575-601 .

Evans, Dawd S. and Linda S. Leighton. “Some Empirical A^cte of Entrepreneurship." American Economic
Review79, no. 3(1989): 519-536.

Evans, David S. and Boyan Jovanovic. “An Estimated Mode! of Entrepreneurial Choice under Liquidity
Constraints.” Joumalof Political Economy Q7, no. 4(1989): 808-827.

Fairiie, Robert W. “ITie /Usance of the Afiican American Owned Business: An Aialysis of the Dynamics of Seif-
Employment.” Journal of Labor Economics 17, no. 1 (1999): 80-108.

Fairiie, Robert W “Entrepreneurship among Disadvantaged Groups: An Aiaiysis of the Dynamics of Self-
Employment by Gender, Race and Education.” The Life Cyde of Entrepreneurial Ventures, International
Handbook Series on Entrepreneurship 3, ed. Simon Parker. Sfxinger: New York, 2006.

Fairiie, Robert W. The Kauffman Index of Entrepreneurial Activity: 1996-2007. Ewing Marion Kauffman
Foundation: Kansas City, 2008.

Fairiie, Robert W "Estimating the Contribution of Immigrant Business Owners to the U.S. Economy," Final
Report for U.S. Small Business Adminisfration, Officeof Advocacy, Washington, D.C, 2008.

Fairiie, Robert W. and Harry A. Krashinsky. “Liquidity Consfraints, Household Wealth, and Entrepreneurship
Revisited," Working Paper, 2008.

Fairiie, Robert W. and Bruce D. Meyer. "Ethnic and Racist Self-Employment Differences and Possible
Explanations," Jouma/ of Human Resources, 31, no. 4(1996): 757-793.

Fairiie, Robert W. and Alicia M. Robb. “Why are Black-Owned Businesses Less Successful than White-Owned
Businesses; The Role of Families. Inheritances, and Business Human Cap\\a\.” Journal of Labor Economics 25,
no. 2 (2007): 289-323.

Fairiie, Robert W. and Alicia M. Robb. Race and Entrepreneurial Success: Black-, Asian-, and White-Owned
Businesses in the United States. Cambridge: MIT Press. 2008.

Fairiie, Robert W. and Christopher Woodruff. “Mexican-American Entrepreneurship.” University of California
Working Paper, 2009.

Fairiie, Robert W.. Julie Zissimopoulos, and Harry Krashinsky. 'The International Asian Business Success
Story? A Comparison of Chinese, Indian and Other Asian Businesses in the United States. Canada and
United Kingdom.” In International Differences in Entrepreneurship, eds. Joshua Lerner and AntcMnette Schoar
(forthcoming), (accessed October 2009). Available from http://www.nber.org/chaptefs/c8221 .pdf.

Feagin, Joe R. and Nikitah Imani. “Racial Barriers to African American Entrepreneurship: An Exploratory Study.”
Social Problems 41, no. 4 (1994): 562-585.

Federal Reserve System, Board of Governors. “Summary of Commentary on Current Economic Conditions by
Federal Reserve Districts," The Beige Book, 2009.

Federal Reserve System, Board of Governors. The AprM 2009 Senior Loan Officer Opinion Survey on Bank
Lending Practices, 2009. Accessed October 2{M)9. Available from http://www.federalreserve.gov/boarddocs/
SnLoanSurvey/200905/.

Greenhaigh, Leonard. Increasing MBE Competitiveness through Strategic Alliances, Washington D.C.: Minority
Business Development Agency. U.S. Department of Commerce, 2008.

Greenlining Institute. Annual Report on Lending to Minorityovmed Small Business: An Analysis of 2008 SBA
Lending to Minorities, 2008.

Holtz-Eakin, Douglas, David Joulfeian, and Harvey S. Roser^. “Entrepreneurial Decisions and Liquidity
Constraints." RAND Journal of Economics 25, no. 2 (1994): 334-347.

Holtz-Eakin, Douglas and Harvey S. Rosen "Cash Constraints and Business Start-Ups: Deutschmarks versus
Dollars." Contributions to Economic Analysis & Policy 4, no. 1 (2005).

Hout, Michael and Harvey S. Rosen. “Self-Employment, Family Background, and Race." Journal of Human
Resources 35, no. 4 (2000): 670-692.

Johansson. Edvard. “Self-Employment and Liquidity Constraints; Evidence from Finland.” Scandinavian Journal
of Economics 102, no. 1 (2000): 123-134.

Kawagudil, Daiji. “Negative Self Selection into Self-Employment among African Americans.” Topics in Economic
Analysis & Policy, Berkeley Electronic Press Journals 5, no. 1 (2005): 1-25.

Kim, Kwang, Won Huiti, and Marilyn Fernandez. “Intragroup Differences in Business Participation: Three Asian
Immigrant Groups.” International Migration Review 23, no. 1 (1 989).

Lentz, Bernard and David Laband. "Entrepreneurial Success and Occupational Inheritance among Proprietors.”
Canadian Journal of Economics 23, no. 3(1990): 563-579.

Lindh, Thomas and Henry OhIsson. “Self-Employment and Wndfall Gains: Evidence from the Swedish Lottery.”
Economic Journal 106, no. 439 (1996): 1515-1526.

Lofetrom, Magnus and Timothy Bates. "Latina Entrepreneurs." Small Business Economics, 2009 (forthcoming).

Lofstrom, Magnus and Chunbei Wang. “Hispanic Self-Employment; A Dynamic Analysis of Business Ownership.”
Univereity of Texas at Dallas Working Paper, 2006.

Mach, Traci L. and John D. Wolken. " Financial Services Used by Small Businesses: Evidence from the 2003
Survey of Small Business Finances.” Federal Reserve Bulletin 87 (2006): 167-195.

Mar, Don. “Individual Characteristics vs. City Structural Characteristics; Explaining Self-Employment Differences
among Chinese, Japanese, and Filipinos in the United States." Journal of Socio-Economics 34, no. 3 (2005).

Meyer, Bruce. “Why Are There So Few Black Entrepreneurs?,” National Bureau of Economic Research, Working
Paper No. 3537,1990.

National Federation of Independent Business. Small Bu&hess Economic Trends, William C. Dunkelberg and Holly
V\fede, 2009. Accessai Ctetober 2009. Available frcwn h^JAWtfw.nfib.com/Portals/0/PDF/sbet/sbet200905.pdf.

Oaxaca, Ronald. “Male-Female V\fege Differentials in Urban Labor Martlets." International Economic Review 14,
no. 3 (1973): 693-709.

Oaxaca, Ronald and Michael Ransom. “On Discrimlnafon and the Decomposition of Wbge Differentials,” Journal
of Econometrics 6^ , no. 1 (1994); 5-21.

Office of Federal Housing Enterprise Overeight. OFHEO House Price Index, 2009. Accessed July 2009.
Available from http://www.oflTeo.gov.

Owens, John and Robert Pazornik. Minority Business Enterprises in the Global Economy; The Business Case.
Prepared in collaboration with the Minority Business Development Agency. Washington D.C.: Minority Business
Development Agency, 2003.

Paricer, Simon C. The Economics of Self-Employment and Entrepreneurship. Cambridge: Cambridge University
Press, 2004.

PricewaterhouseCoopere (PwC) and the National Venture Capital Association. MoneyTree'^** Report, based on
data provided by Thomson Reutere, 2009. Accessed October 2009. Available from www.pwcmoneytree.com.

Robb, Alicia. The Role of Race, Gender, and Discrimination in Business Survival. PhD. Diss., University of
Michigan Press, 2000.

Sohl, Jeffrey. “The Angel Investor Market in 2008; A Down Year In Investment Dollars But Not In Deals." Center
for Venture Research, 2008. Accessed October 2009. Available from http://wsbe.unh.edu/files/2008_Analysis_
Report_Final.pdf.

Taylor, Mark P. “Self-Employment and Wndfall Gains in Britain: Evidence from Panel Data." Economica 68, ho.
272 (2001): 539-565.

U.S. Census Bureau. 1992 Economic Census: Characteristics of Business Owners. Washington, D.C.: U.S.
Government Printing Office, 1997.

U.S. Census Bureau, M/eafrh and Asset Ownersri/p, 2008. Accessed July 2009. Available from http://www.
census.gov/hhes/www/wealth/2002_tables.html.

U.S. Census Bureau. 2002 Economic Census, Survey of Business Owners Company Statistics Series.
VNfeshington, D.C.; U.S. Government Printing Office, 2006.

U.S. Department of Comment, Minority Business Development Agency and Milken Institute. The Minority
Business Challenge: Democratiiing Capital for Emerging Domestic Ma/kefs. Research Report, Glenn Yago and
Aaron Pankrat, 2000.

U.S. Department of Commerce, Economics and Statistics Administration and the Minority Business Development
Agency. Keys to Minority Entrepreneurial Success: Capital, Education and Technology, Patricia Buckley, 2002.

U.S. Department of CcHrotwrce, Minority Busina Dev^pment Agency. Accelerating Job Creation and
Economic Productivity: Expanding Financing Opportunities fc^ Minority Businesses, 2004.

U.S. Department of Commerce, Minority Business Ctevetopment Agency. The State of Minority Business
Enteiprises, An Overviewofthe 2002 Survey (EBusiness Owners, Number of Firms, Gross Receipts, andPaid
Employees. 2006.

U.S. Department of Commerce, Minority Busina Development Agency. The State of Minority Business (feet
sheet), 2008. Accessed October 2009. Available from http:/Aivww.mbda.gov/index.php?sectionJd=6&bucket_
id:=789#bucket„852.

U.S. Department of Commerce, Minority Business Devetopment Agency. Characteristics of Minority Businesses
and Entrepreneurs, An Analysis of the 2002 Survey of Business Owners, 2008.

United States Small Business Administration, Office of Advocacy. Availability of Financing to Small Firms using
the Survey of Small Business Finanr^s. K. Mitchell, K. and D.K. Pearce, 2005.

U.S. Small Business Administration, Office of Advocacy. Educational Attainment and Other Characteristics of the
Self-Employed: An Examinatbn Using the Panel Study of Income Dynamics Data, C. Moutray, Washington, D.C
Working Paper, 2007.

U.S. Small Business Administration. CDC/504 Program. Accessed October 2009. Available from htfr):/Awww.sba.gov.

van der Sluis, J., van Praag, M., and Vi|verberg, W. Education and Entrepreneurship in Industrialized Countries:
A Meta-Analysis. Tinbergen Institute Working Paper no. Tl 03-046/3, Amsterdam; Tinbergen Institute, 2004.

About the Authors

Dr. Robert W. Fairlie

Dr. Robert W. Fairlie is a Professor of Economics at the University of California, Santa Cruz, Director of
the UCSC Masters Program in Applied Economics and Finance, and adjunct researcher at RAND, He
was a Visiting Fellow at Yale University, Australian Nationa! University, and iZA, in Germany. His research
interests include entrepreneurship, technology, inequality, labor economics, education, and immigration.

He recently published “Race and Entrepreneurial Success: Black-, Asian-, and White-Owned Businesses
In the United States” with MIT Press. He is also author of the Kauffman Index of Entrepreneurial Activity.
He has published numerous articles in leading academic journals in economics, public policy, management
and demography. He has testified to the U.S. Congress, U.S. Department of Treasuiy and the California
State Assembly regarding the findings from his research. Dr. Fairlie holds a Ph.D. and M.A. in Economics
from Northwestern University and a B.A. with honois from Stanford University.

Dr. Alicia M. Robb

Dr. Alicia M. Robb Is a Senior Economist with Beacon Economics, specializing in minority entrepreneurship,
small business outcomes, lending discrimination, government procurement, and economic development.
She is currently a Senior Research Fellow with the Ewing Marion Kauffman Foundation. She is also the
Founder and President of the Foundation for Sustainable Development, an international development
organization working with local nonprofit organizations In six countries throughout Latin America, East
Africa, and South Asia. She has worked as a staff economist for an economic consulting firm and as an
economist for the Office of Economic Research in the Small Business Administration and for the Division
of Research and Statistics at the Federal Reserve Board of Governors. She recently published “Race
and Entrepreneurial Success: Black-, Asian-, and White-Owned Businesses in the United States” with
MIT Press. She received her Ph.D. in Economics from the University of North Carolina at Chapel Hill,
specializing in economic development and econometrics.

Ms. Castillo. Thank you.

The good news is we are making significant inroads. In 2014
alone, MBDA helped secure over $2 hillion in capital and financing.
The creation of MBDA’s new Access to Capital Team is helping us
introduce our clients not only to traditional lending sources but
also to alternative ones.

Our work is twofold — to educate and prepare our MBE clients
and firms about the type of financing available, and to advocate
and educate a broad array of capital and lending institutions about
the growth potential of MBEs.

While debt capital, bank lending, continues to be the primary
source of financing for small and minority-owned firms, we also
know that in order for these firms to grow they need to explore eq-
uity capital as well. Once again, MBDA is focused on finding ways
to unleash a broad spectrum of capital opportunities.

This past October, I spoke at the Minority Finance Forum hosted
in partnership with the Association for Corporate Growth in Chi-
cago. I addressed over 800 investment bankers, private equity
groups, bank fund managers, family offices, mergers and acquisi-
tions companies, and encouraged them to look at MBEs as possible
partners.

We are making inroads here in Maryland. One success is that of
our Baltimore Business Center and their work with M. Luis Con-
struction, Inc., the only minority and woman-owned asphalt manu-
facturer in the nation. The Baltimore Business Center’s consulting
services led to $27 million in procurement and $21 million in sur-
ety bonding for M. Luis Construction. We are pleased to be part of
their success.

Our mission is to champion minority businesses nationwide. We
are unyielding in this pursuit.

On behalf of MBDA and the U.S. Department of Commerce,
thank you, Mr. Chairman and the Committee, for the opportunity
to testify.

Understanding that the changing role of minority businesses in
our nation’s economic future is mission-critical and supporting
their growth through access to capital is paramount. Now, more
than ever, our nation’s diversity translates into economic advan-
tages in domestic and global marketplaces.

We salute the Committee, the Committee’s work in addressing
obstacles to capital faced by minority businesses.

I welcome the opportunity to discuss further MBDA’s efforts to
encourage the full spectrum of financing and capital access. I am
happy to answer any questions.

Thank you very much.

[The prepared statement of Ms. Castillo follows:]

Written Testimony of Alejandra Y. Castillo, National Director
Minority Business Development Agency
U.S. Department of Commerce
Before the

U.S. Senate Committee on Small Business and Entrepreneurship

“Minority Access to Capital” Field Hearing
March 16, 2015
Bowie State University
Bowie, Maryland

Introduction

Good Morning Chairman Vitter, Ranking Member Cardin, and Members of the
committee. I am Alejandra Castillo, and I serve as the National Director for the Minority
Business Development Agency, also known as MBDA, at the U.S. Department of
Commerce.

My testimony will outline MBDA’s mission and vision in assisting minority-owned firms to
gain greater access to capital, contracts and markets. For the purpose of this hearing, I
will focus exclusively on the continued challenge of access to capital to sustain not just
the start of minority business enterprises (MBEs), but more importantly the growth of
these firms. My testimony today will highlight the research findings and underscore the
actions that we are taking to create a more robust and sustainable eco-system that will
help minority businesses obtain capital for their current and future needs. In addition, I
will review some specific areas where we have achieved success right here in
Maryland.

Role of MBDA

Our U.S. Department of Commerce Secretary, Penny Pritzker, has laid out an
aggressive “Open for Business Agenda” that highlights the critical need to focus on
trade and investment, innovation, data, and the environment in order for the United
States to be successful in the twenty-first century global economy. The Commerce
Department’s “Open for Business Agenda” focuses on entrepreneurship and innovation
which drives the central purpose of my agency’s work to ensure that America’s minority
business community continued to grow in size and scale and continue to drive value
and global competitiveness.

For over forty-five years, MBDA has been working aggressively to expand the economic
footprint of MBEs. According to the U.S. Census Bureau’s 2007 Survey of Business
Owners, these MBE firms contributed $1 trillion in total economic output and employed
nearly six million Americans.^ These findings highlight that the economic contribution of
minority firms has a direct and significant impact on the national economy, and more
recent Census reports demonstrate that this impact is continuing to grow.

^ U.S. Census Bureau, 2007 Survey of Business Owners, June 2010.

The demographic data is clear; America’s population make-up is changing. By 2020,
more than half of the nation’s children are expected to be part of a minority race or
ethnic group, ^ by 2043, the minority population will be the majority group in this country.
Therefore, as the demographic composition of our country changes, so too does the
face of our business community. With over 5.8 million MBEs, and growing, the U.S.
Business community is transforming, and the way we do businesses in America is
changing. Not just in terms of its consumers, but also in terms of the growing number of
minority firms that are delivering the goods and services of today’s economy.® Engaging
MBEs is essential to support the future of American business and ensure the U.S,
remains globally competitive.

The growth in the number of minority-owned firms is a positive trend. However, there
are improvements that can be made, as these firms seek to expand in size and scale. It
is critical that we create and foster an eco-system that allows for growth of these firms.
Unfortunately, MBEs continue to encounter many obstacles that include barriers to
accessing capital, contracts, and export markets.

MBDA serves as the only federal agency tasked to help MBEs realize their full
economic potential through technical assistance, public and private contracting
opportunities, advocacy, research, education, and by serving as a strategic partner for
growth and development.

The bulk of this work is accomplished through our nationwide network of MBDA
Business Centers. Each center provides services that assist businesses in accessing
capital, contracts, and new markets, as well as helping them to grow in size and scale.
Since 2009, MBDA has assisted clients in accessing nearly $26 billion in contracts and
capital, while helping them create and retain over 87,000 jobs.

Success in Maryland

In the fall of 2013, MBDA opened a business center in Baltimore, Maryland, operated by
the City of Baltimore Mayor’s Office of Minority and Women-Owned Business
Development. Since opening, the center has been engaged with M. Luis Construction
Inc,, a nationally recognized small business with more than 200 employees and the only
Minority Business Enterprise and Women’s Business Enterprise asphalt manufacturer in
the nation. The Baltimore MBDA Business Center has played a role in M. Luis
Construction’s continuing success through assisting public and private relationship
management and navigating procurement opportunities across the state of Maryland.
MBDA’s Baltimore Business Center efforts have led to over $27 million in procurement,
and brought $21 million in surety bonding.

® Frey, William H., "Census Projects New Majority Minority" Tipping Points. State of
Metropolitan America. The Brookings Institution, 3 December 2012.

® U.S. Census Bureau, 2007 Survey of Business Owners, June 2010.

Research Findings

While the success of M. Luis Construction is impressive and representative of the types
of business development assistance that MBDA delivers its clients across the country,
this type of success is far too uncommon in the minority business community as a
whole, despite our best efforts, due to continued institutional and systematic barriers. In
2010, MBDA released a report titled “Disparities in Capital Access.”'' Some of the key
findings include:

• Minority-owned firms receive lower loan amounts than non-minority firms - While
the average loan amount for all high-sales minority firms was $149,000, non-
minority firms received an average of $31 0,000 or more than twice the amount.

• Minority-owned firms are more likely to be denied loans - Among firms with gross
receipts under $500,000, loan denial rates for minority firms were about three
times higher compared to those of non-minority-owned firms. For high sales
firms, the rate of loan denial was almost twice as high for minority firms as for
non-minority firms.

• Minority-owned firms receive lower loan and equity investment amounts -
Minority firms averaged $29,879 in external debt compared with $36,777 for non-
minority firms. Minority firms had the most trouble obtaining external equity with
$2,984 on average compared with $7,607 on average for non-minority firms.

• Lower wealth levels are a barrier to entry for minority entrepreneurs - Estimates
from the U.S. Census Bureau indicate that half of all Hispanic families have less
than $7,950 in wealth, and half of all African American families less than $5,446.
Wealth levels among non-minorities are 11 to 16 times higher. Low levels of
wealth and liquidity constraints in turn create a substantial barrier to entry for
minority entrepreneurs because the owner’s wealth can be invested directly in
the business, used as collateral to obtain business loans or used to acquire other
businesses.

In order to expand on these findings, MBDA has recently commissioned a study to
examine the use of alternative financing solutions, including crowd funding, peer-to-peer
lending, and family office investment networks. The upcoming report will highlight
financing solutions used by minority-owned businesses in high-growth industries.

In 2013, the Selig Center for Economic Growth released the “Multicultural Economy”
report, which focused on the economic buying power of minorities. One of the boldest
findings is that by 2018, the combined buying power of African Americans, Asians,
Pacific islanders and Native Americans will be $2.6 trillion.® This combined buying
power will account for 16.4 percent of the nation’s total buying power.® MBEs have the

^ U.S. Department of Commerce, Minority Business Development Agency, Disparities in
Capital Access between Minority and Non-Minority-Owned Businesses: The Troubling
Reality of Capita! Limitations Faced by MBEs (201 0).

® Selig Center for Economic Growth, Terry College of Business, The University of
Georgia, June 2013.

® Ibid.

highest understanding and connection to this large and high-growth segment of the
economy; and by working to support their business efforts, the U.S. Department of
Commerce can capitalize on these new domestic markets, in addition, we know that
MBEs are also twice as likely to export as non-minority firms. ^ Therefore, the potential
growth of MBEs through exports is also a fast growing segment of their business
operations.

Access to Capital for Minority-owned Businesses

In 2014, MBDA helped to secure over $2 billion in capital and financing for clients. In
addition to traditional sources, we created a new Access to Capital Team to introduce
our clients to alternative capital sources. This work has been two-fold; to educate
clients and firms about the types of alternative financing available, and to advocate on
their behalf with the kind of resource partners that minority owned firms cannot access.
Minority firms lack access to many of the types of people that are in the room today:
venture capitalists, angel investors, mergers and acquisitions firms, firms with internet-
based platforms, and the many other firms that act as ever more important alternative
sources of capital.

This past October, I had the opportunity to speak at the Minority Finance Forum, hosted
in partnership with the Association for Corporate Growth in Chicago, I addressed over
800 investment bankers, private equity groups, bank fund managers, family offices,
merger and acquisition companies, and banks in expressing the need for minority-
owned firms to play a role in the middle market and break the barrier in accessing
capital- and they all agreed. MBDA will continue to engage firms like these to help
expand access for minority owned firms.

Debt capital (bank lending) is the primary source of financing for small and minority
owned firms and plays a vital role in purchasing new inventory, hiring, and maintaining
cash flow to grow their businesses. Forty-eight percent of business owners report a
major bank as their primary lending source and thirty-four percent report a regional and
community bank.® MBDA advocates for MBEs in the traditional banking space through
relationships with national level banks and countless community banks through MBDA’s
national network of business centers. We are also working with SBA on increasing
opportunities for MBEs to pursue micro lending opportunities.

MBDA is also engaged in the use of alternative finance through partnerships with a
large portfolio of alternative capital providers including internet based lenders, angel
investor networks, micro lenders. Community Development Financial Institutions, and
other investors in the middle-market space.

^ U.S. Department of Commerce, Minority Business Development Agency, Fact Sheet:
Minority-Owned Firms Lead the Nation in Exporting (2012).

® Mills, Karen and McCarthy, Brayden, The State ofSmaii Business Lending: Credit
Access During the Recovery and How Technology May Change the Game (July 22,
2014). Harvard Business School General Management Unit Working Paper No. 15-004.

There is a rising class of fund managers in minority and women managed hedge funds.
Many states, including Maryland, have policies to consider minority and women owned
firms in the allocation process to ensure that the make-up of firms managing pension
assets mirrors the employee and customer base, and to provide opportunities to
managers that have historically been underrepresented in the investment management
arena.

These fund managers, called emerging managers, have the potential to outperform
established hedge funds due to their ability to stay nimble, access less crowded trades,
and focus on performance. Utilizing emerging managers also goes a long way in
helping to bridge the wealth gap.

Conclusion

I want to thank you and this Committee for the opportunity to speak with you today.
Understanding the growing role of minority businesses in our Nation’s economic future
is critical; however, being able to support and enhance their growth through access to
capital is paramount. We welcome this committee’s work in addressing these current
challenges. As we move forward, MBDA will continue to highlight the strategic
importance that MBEs play in the American economy and to find solutions to address
the continued challenges that MBEs face when it comes to being “Open for Business.”
On behalf of MBDA and the U.S. Department of Commerce, I welcome the opportunity
to discuss MBDA’s commitment to strengthening the minority business community. I am
happy to answer any questions you may have.

Senator Cardin. Thank you very much for your testimony.

Mr. Doss.

STATEMENT OF ANTONIO DOSS, DISTRICT DIRECTOR WASH-
INGTON METROPOLITAN AREA, U.S. SMALL BUSINESS AD-
MINISTRATION

Mr. Doss. Good morning, Ranking Member Cardin and Con-
gresswoman Edwards.

Administrator Contreras-Sweet sends her regards and regrets as
she could not attend today’s hearing.

I am Antonio Doss, and I serve as District Director of the U.S.
Small Business Administration’s Washington Metropolitan Area
District Office.

I am joined today by my colleague, Steve Umberger, the District
Director of SBA’s Baltimore Office, which supports entrepreneurs
and Maryland’s small business owners who reside outside of Prince
George’s and Montgomery Counties.

As you know, SBA’s mission is to strengthen the nation’s econ-
omy by enabling the establishment and vitality of small businesses.
Underpinning all of our efforts is this notion of inclusive entrepre-
neurship. By this, I mean we work to ensure that SBA products
and services are available to small business owners regardless of
age, race, gender, geography, or socioeconomic status.

My testimony today will focus on our lending programs, but I
would be remiss if I did not mention government contracting be-
cause of the essential role it plays in the Capital Region and
throughout Maryland.

SBA programs, like the 8(a) Business Development Program and
HUBZone, help ensure that underserved small businesses receive
their fair share of the Federal pie. Last year, we were pleased to
join Senator Cardin and the NASA administrator to announce that
the Federal Government met our statutory goal of awarding at
least 23 percent of all Federal contracts to small businesses.

But on the topic of today’s hearing, providing more capital to un-
derserved and minority small businesses, this has been a particular
focus of Administrator Contreras-Sweet.

In fiscal year 2014, we made loans more affordable by waiving
fees on all 7(a) loans under $150,000. As a result, minority lending
under $150,000 increased 23 percent in fiscal year 2014. We are
encouraged by these results and plan to continue the fee waiver in
fiscal year 2016.

The micro loan program is another key piece in our underserved
strategy. It helps ensure that borrowers have the support and tech-
nical assistance they need. The micro lending program provides
funding for loans up to $50,000 through nonprofit lenders.

Over half of all micro loans have been awarded to minority-
owned businesses. Nearly 30 percent of all micro loans were award-
ed to African-American business owners.

Another effective program for underserved borrowers is our com-
munity advantage program. This program allows our micro lenders,
CDCs, and other non-bank lenders to offer 7(a) loans up to
$250,000. The program also helps meet the credit management and
technical assistance needs of small businesses in underserved mar-
kets that might not quality for traditional financing.

SBA approved a record $19.2 billion in lending under the 7(a)
program last year. We are on track for another record-breaking
total this year.

Maryland small businesses received $245 million in SBA-sup-
ported loan approvals under the 8(a) program. Maryland’s minor-
ity-owned businesses accounted for 38 percent of the number of
7(a) guaranteed loans by SBA in the State and 44 percent of the
dollar value.

We have made progress on underserved lending, but we know
more must be done to achieve our vision. We are taking steps to
do more by making SBA loans easier to access, quicker to process,
more affordable, and less cumbersome to originate.

This spring, we will roll out SBA One, a revamped lending plat-
form that will serve as a one-stop shop for all steps of the loan
process, from determining eligibility through closing out the loan.

In another effort to streamline the SBA process, last year we
rolled out a new SBA predictive credit scoring model for loans
$350,000 or less. It puts greater emphasis on a borrower’s business
score.

Finally, we are making it easier to connect with SBA lenders.
Just last month, we introduced a new web-based tool called LING.
It allows prospective borrowers to fill out a simple online form and
get connected with interested SBA lenders within 48 hours.

LING began by connecting small business owners with micro
lenders and nonprofit lenders. Later this year, we plan to add
banks and conventional commercial lenders.

SBA remains committed to helping current and aspiring entre-
preneurs secure the financing and the support they need to start,
sustain, and grow their businesses. The new tools we have imple-
mented are designed to get more credit in the hands of small busi-
nesses from all walks of life. We are committed to innovations that
will allow us to serve and assist minority-owned businesses in
Maryland and across America.

Thank you for the opportunity to provide this testimony, and I
welcome your comments and questions.

[The prepared statement of Mr. Doss follows:]

U.S. Small Business Administration
Washington, D.C. 20416

TKSTIMONY of
Antomo Doss

District Director, Washington Metropolitan Area
U.S. Small Business Administration

U.S. Senate Small Business and Entrepreneurship Committee
Monday, March 16, 2015

Good morning, Ranking Member Cardin, and members of the committee. Administrator
Contreras-Sweet sends her regards and regrets that she could not attend today’s hearing.

I am Antonio Doss, and 1 serve as District Director of the U.S. Small Business
Administration’s Washington Metropolitan Area District Office. Our office is one of 68
district offices located in major markets around the country. Although based in the District
of Columbia, we support the small business community in Prince George's County,
Montgomery County, Northern Virginia and Washington, D.C.

I am joined today by my colleague, Steve Umberger, the District Director of the SBA’s
Baltimore District Office, which supports entrepreneurs and Maryland small business
owners who reside outside of Prince George’s and Montgomery Counties.

As you know, the SBA’s mission is to strengthen the nation’s economy by enabling the
establishment and vitality of small businesses. We help create an environment whereby
entrepreneurs and small business owners have unmatched federal support to innovate,
launch, hire and grow - and in so doing, become critical drivers of their local economies.

Underpinning all of our efforts is the notion of inclusive "entrepreneurship." By this 1 mean
that we work to ensure that SBA products and services are available to small business
owners regardless of age, race, gender, geography or socioeconomic status. Indeed, our
current Administrator has placed a special emphasis on strategies that enable us to better
reach underserved and economically challenged segments of our market.

My testimony today will focus on our lending programs, but 1 would be remiss if 1 did not
mention government contracting, because of the essential role it plays in the capital region
and throughout Maryland. Government contracts provide billions of dollars in revenue for
local small businesses. SBA programs like the 8(a) business development program and
HUBZone help ensure that underserved small businesses receive their fair share of the
federal pie.

Last year, we were pleased to join Senator Cardin and the NASA Administrator to announce
that the federal government met our statutory goal of awarding at least 23 percent of
federal contracts to small businesses. This was an important achievement that meant more
than $83 billion flowed to small firms, which create nearly two out of three net private-
sector Jobs in America.

Providing more capital to underserved and minority small businesses has been a particular
focus of Administrator Contreras-Sweet. She was a commercial business banker in Los
Angeles specializing in minority lending before joining President Obama’s cabinet. She has
a unique understanding that many minority communities were hit especially hard in the
recession, and the SBA plays a special role to serve these communities since our charter is
to fill in the gaps of commercial lending.

In FY 2014, we made loans more affordable by waiving fees on all 7 (a) loans under
$150,000. As a result, minority lending under $150,000 increased 23 percent in FY 2014.
We are encouraged by these results, and plan to continue the fee waiver in FY 2016.

The microloan program is another key piece in our underserved strategy. It helps ensure
that borrowers in all communities have the support and technical assistance they need to
start a business, grow, and ultimately achieve long-term success. The microloan program
provides funding for loans up to $50,000 through non-profit lenders. Over half of all
microloans have been awarded to minority-owned businesses; nearly 30 percent of
microloans were awarded to African-American business owners. This community was hit
particularly hard by the economic crisis.

Another effective program for underserved borrowers is our Community Advantage Loan
Program. This program allows our microlenders, CDCs, and other non-bank lenders to offer
7(a) loans up to $250,000. The program also helps meet the credit, management, and
technical assistance needs of small businesses in underserved markets that might not
qualify for traditional financing.

SBA approved a record $19.2 billion in lending under the 7 (a) program last year. We
expect another record-breaking total this year based on the escalating demand for SBA
financing. Last year, $5.5 billion dollars - or 29 percent of all 7(a) loans - were awarded to
minority borrowers. Maryland small businesses received $245 million in .SBA-supported
loan approvals under the 7(a) program. Maryland’s minority-owned businesses accounted
for 38 percent of the number of loans guaranteed by SBA in the state and 44 percent of the
dollar value.

We have made progress on underserved lending, but we know more must be done to
achieve our vision. We are taking steps to do more by making SBA loans easier to access,
quicker to process, more affordable, and less cumbersome to originate.

SBA partners with 80 active lenders serving Maryland businesses, and we are working to
expand that number through an aggressive loan modernization program. This spring, we

will roll out SBA One, a revamped lending platform that will serve as a one-stop shop for all
steps of the loan process, from determining eligibility through closing out the loan.

In another effort to streamline the SBA loan process, last year we rolled out a new SBA
predictive credit scoring model for loans $350,000 or less. It puts greater emphasis on a
borrower's business credit score, so those who incurred personal debt during the
downturn can still qualify for a small business loan. These reforms are dramatically cutting
the time and cost of receiving SBA-backed financing.

Finally, we are making it easier to connect with SBA lenders. Just last month, we
introduced a new Web-based tool called LINC. It allows prospective borrowers to fill out a
simple online form and get connected with interested SBA lenders within 48 hours. LINC
will roll out in waves. It began by connecting small business owners with microlenders and
nonprofit lenders. Later this year, we plan to add banks and conventional commercial
lenders.

SBA remains committed to helping current and aspiring entrepreneurs secure the financing
and support they need to start, sustain, and grow their enterprises, The new tools we have
implemented are designed to get more credit in the hands of small businesses from all
walks of life. We are committed to innovations that will allow us to serve and assist
minority-owned business in Maryland and across America.

Thank you for the opportunity to provide this testimony, and I welcome your comments
and questions.

Senator Cardin. Thank you very much for your testimony.

Mr. Hairston.

STATEMENT OF CARL L. HAIRSTON, ADMINISTRATIVE VICE

PRESIDENT, M&T BANK, NATIONAL CAPITAL BUSINESS AND

PROFESSIONAL BANKING REGIONAL MANAGER

Mr. Hairston. Good morning. Thank you, Senator Cardin, for
hosting this meeting, and as well to Congresswoman Edwards in
her absence. On behalf of our Chairman and CEO, Robert Wilmers,
of M&T Bank, we appreciate the opportunity to testify this morn-
ing.

We are very committed as a bank to small business lending
throughout all of our geographies. We continue to be committed to
small business lending. We are one of the 20th largest banks in the
country, but we are the 6th largest Small Business Administration
lender in the country. So we continue to be very committed.

When you look at — and I will speak on both our commitment to
the Baltimore District Office of the SBA as well as the Washington
District Office of the SBA. And just to share some figures, we con-
tinue to be the number one SBA lender in volume in both districts.
So when you look at the Maryland area, we continue to drive the
most small business lending volume through the SBA in these ge-
ographies.

One thing that I wanted to highlight in addition to the written
testimony that I already provided, when you look in the Baltimore
District, of the SBA loans that we issued, 29 percent of those loans
were issued to minorities in the Baltimore District.

When you look at the Washington District Office, 45 percent —
of the loans that we extended in the most recent fiscal year ending
September 30, 2014, 45 percent of those loans were extended to mi-
norities.

When you look and include females, white females in that num-
ber, in the Washington District, it actually totals 56 percent, and
in Baltimore it totals almost 45 percent.

So our commitment is very sound.

With that, we still continue to see challenges in working with mi-
norities, and that is why we have partnered with organizations
such as the Bowie BIG here in Prince George’s County, to further
strengthen opportunities to work with minority businesses, as well
as other organizations across the region.

To highlight some of the challenges we continue to see when we
look at some of the lending volume, both SBA and non-SBA, many
of the challenges surround equity injection challenges, with minor-
ity borrowers being able to meet equity injection requirements.

And then also, when we think about the most recent downturn
and some of the regulatory changes that many financial institu-
tions have to address and have to speak to with borrowers, is li-
quidity. So even after a minority borrower has brought forth the re-
quired equity injection, we also look at what resources do they have
to fall back on should they encounter a challenge or difficulty with
either their startup or their existing business.

And the biggest thing that we see is really collateral shortfalls.
When you look here in Prince George’s County, prior to the down-
turn, we saw minority businesses making even greater strides prior

to the downturn. What many lenders were able to leverage towards
lending to minority borrowers then was the equity that existed in
their residences.

So when you look at this geography, many of the businesses tend
to be more service business-oriented. So they are not capital-inten-
sive. They do not really have the fixed assets that you can typically
fall back to serve as collateral. Being that they are more service-
oriented, the collateral challenges with lending to those types of
businesses are even greater.

We absolutely leverage the Small Business Administration, but
even leveraging the Small Business Administration, we still typi-
cally do not have enough collateral to shore up what that gap may
be between what the guarantee will be provided by the SBA versus
the assets that a minority borrower has to fall back on for collat-
eral purposes.

So when we look, we see those as some of the challenges we con-
tinue to try to overcome when we are lending to minority bor-
rowers.

We are very committed in working with all of the partners in ad-
dition to the SBA to find ways to extend more loans to minority
borrowers, and we are interested in continuing the dialogue and
being a part of any further discussions to support minority busi-
ness lending in this region.

Thank you.

[The prepared statement of Mr. Hairston follows:]

Written Statement of Carl Hairston of M&T Bank
Small Business & Entrepreneurship Committee Field Hearing
“Minority Access to Capital"

March 16, 2015

Thank you, Senator Cardin, for the opportunity to speak today on small business financing in general and
minority access to capital in particular. These are very important topics.

My name is Carl Hairston. I am the Administrative Vice President & Regional Manager of M&T Bank's
National Capital Business & Professional Banking Group. I cover the District of Columbia, Prince
George's County, Arlington, Alexandria and McLean, Virginia. In my role as VP and Regional Manager, I
oversee the lending and servicing team that is responsible for the loan and deposit portfolios as well as
the development of new business.

I also lead M&T's Diversity Business Group, which was established in 2006 to provide access to senior
leaders of the Bank to business executives and key community stakeholders in order to increase the
Bank’s market share in diverse business communities as well as leads the Bank's African-American
Recruitment and Retention Committee.

I am proud to say that M&T is the most active SBA 7(a) lender in Maryland as well as the Washington
Metropolitan District of the SBA in loan volume and have been for the past five years consecutively. In
2014, M&T processed 297 loans to local businesses, totaling $37.6 million in FY14 (average loan size of
$126,000) in the Baltimore District of the SBA and 128 loans to local businesses, totaling $18.8 million in
FY14 (average loan size of $147,000) in the Washington Metropolitan District of the SBA. In addition to
SBA loans, M&T offers many business credit products, from lines of credit to term loans where our
average loan size is approximately $158,000.

Thank you again for the opportunity to speak today and tell M&T’s story about small business lending and
my experiences with the diversity business group. I look fonvard to answering any questions you may
have.

Senator Cardin. Thank you very much for your testimony.

Mr. Tucker.

STATEMENT OF STANLEY W. TUCKER, PRESIDENT AND CEO,
MERIDIAN MANAGEMENT GROUP, INC.

Mr. Tucker. Senator Cardin, thank you so much for being — in-
viting me here to testify.

I am actually wearing two hats this morning. I am wearing the
hat as President of Meridian Management Group, where we man-
age several funds, but I am also representing the National Associa-
tion of Investment Companies, which is a trade association that fo-
cuses on providing equity capital to minority- and women-owned
businesses.

Meridian Management Group — actually, at one point, I was a
state employee, but then we privatized.

We manage actually several funds. We manage the Maryland
Small Business Development Financing Authority. We manage In-
vest Maryland, which is an equity capital for early stage funds. We
manage another fund called Maryland Casino Business Investment
Fund, where we can provide debt and equity. And, we also manage
Community Development Ventures, Inc.

And our strategy. Senator, over the years was that we wanted
to be able to provide a continuum of financing products, if you will,
where we can actually birth a company and be involved with them,
taking them all the way public, and we have done that for several
years.

What is important is what is the return. I am specifically talking
about the State of Maryland. When you look at the kind of invest-
ments in lending that we are involved with in Maryland, you look
at the economic impact that we are providing. And we do an eco-
nomic impact every five years.

In the last five years, the deals that we did generated about $3.4
billion in sales, about $1.04 billion in income, generated and cre-
ated about 3,007 full-time jobs, and also created and generated
about $109 million in state and personal income taxes and about
another $31 million in other income taxes, which totaled about
$140 million in taxes.

And if you look at the investment that the State made over that
period of time, it is about $21 million they invested in the Mary-
land Small Business Development Financing Authority.

However, if you look at the return, they are getting 8 to 1 return
on investment. If you factor in a loan loss, it becomes a 6.6 to 1
return on investment. So, a tremendous investment that the State
is realizing as a result of investing in the Maryland Small Business
Development Financing Authority.

Also, if you look at the demographics, as we know, demographics
drive everything. In Maryland right now, as we speak, K through
12 is majority minority. So if you project out. Senator, you will see
that the employment, the jobs, the workers, etc., school-age, col-
lege-age, it is going to be majority minority.

And so what we have found is that if we can, in fact, grow these
minority- and women-owned businesses because there is a direct
correlation between the growth of these businesses and who they
are, minorities hire minorities; women hire women.

And particularly, what is a very key point that we found in our
analysis is that minority businesses are more susceptible to hiring
ex-offenders, and that is very, very important because we know the
challenge ex-offenders have once they are released. I mean, they
are literally cut off from everything, if you will.

But we have found that they are, in fact, really more susceptible.
Why do they do it is because most of them have relatives and
friends and neighbors, and what not, that they know that they
need a job. They are good people. They have made a mistake, but
they need to have a second chance.

I have been testifying in the legislature this year and last year
about second chance, expungement, etc., because it is very, very
important.

So the growth of these businesses is very, very important. So we
are developing this strategy and have been developing this strategy
to grow these businesses.

Obviously, access to capital is a critical, critical part of not just
debt but also equity.

Changing hats for a minute, the National Association of Invest-
ment Companies is a trade association that provides particularly
equity financing for small minority, and particularly minority, and
women-owned businesses.

Senator, this is very, very important. I have several reports here,
if you will, and with regard to the returns that these funds that
focus on minority businesses provide to their investors. And their
returns are actually superior to the general private sector market,
if you will.

But there was this kind of opinion that because we were invest-
ing in minority- and women-owned businesses that our return
would not be as high. That is absolutely not the case. We have
independent studies here that were done by KPG and others, show-
ing the return.

However, even with those returns, obtaining funds from the pen-
sion funds around the country is challenging. Why? Well, pension
funds have these consultants which they call gatekeepers, if you
will.

And the gatekeepers do not want to get out of their comfort zone,
if you will, because, to be quite candid with you, there is this bias
because they feel as though that if they are investing in minority-
and women-owned businesses the returns are not going to be the
same. Well, the studies absolutely show that is not the case.

And so we do these studies so we can talk with the gatekeepers
but also talk with those that are making the decisions at the board
levels as well as to really what can happen if, in fact, these funds
can go into these firms that are investing in minority- and women-
owned businesses.

If you look at the size of the funds, the average minority-owned
venture capital fund or private equity fund is about $150 million;
the average fund in the other areas is close to a half a billion dol-
lars. And so there is a huge disparity there in terms of the capital
that is needed to invest in these.

But we have shown that we have given the returns. We have
shown that we are taking companies public. We do not know what

else to do, and so we really need some assistance in making that
happen.

I will stop there and he happy to answer any questions.

[The prepared statement of Mr. Tucker follows:]

Stanley W. Tucker, President
Meridian Management Group, Inc.

Page 1 of 4

Testimony of Stanley W. Tucker
before the

U.S. Senate Committee on Small Business & Entrepreneurship
Field Hearing Regarding Access to Capital for Minority’-Owned Businesses

My name is Stanley W. Tucker, President of Meridian Management Group, Inc. At the request
of the Honorable Senator Ben Cardin, 1 am here today to provide testimony on the lack of access
to capital by minority-owned businesses.

Meridian Management Group, Inc. (“MMG”), formed in 1 995, is a private for-profit fund
development and management firm with particular expertise investing in small, minority, women
and veteran-owned business markets. Our management team has more than 200 years combined
expertise in the market, long-standing working relationship among its partners, a proven track
record of success and a commitment to underserved markets.

Our mission is to create wealth via the efficient deployment of capital to under-served markets.
MMG creates and manages innovative debt and equity funds that target small, minority, women
and veteran-owned businesses. We also provide management and technical assistance as an
integral part of our underwriting and portfolio management process.

MMG currently manages the following funds:

• Maryland Small Business Development Financing Authority ("MSBDFA”);

• A portion of the Invest Maryland program;

• Maryland Casino Business Investment Fund (“MCBIF”) which is one of the Video
Lottery Terminal Funds administered by the State of Maryland;

• Community Development Ventures, Inc. (“CDV”); and

• MMG Ventures, LP, a specialized small business investment corporation.

Through its family of funds, MMG offers various forms of debt, bonding and equity financing.
These funds are designed to complement each other.

Stanley W. Tucker, President
Meridian Management Group, Inc.
Page 2 of 4

Debt

Bonding;

Equity

MSBDFA Contract Financing

MSBDFA Surety Bondi ng

MSBDFA invest Maryland Program

MSBDFA Long Term Guaranty

MSBDFA Equity Participation
Investment Program ("EPIP")

MSBDFA Equity Participation

Investment Program {"EPiP")

Community Development
Ventures ("CDV”)

Maryland Casino Business Investment
Fund {''MCBiF“)

MMG Ventures

The growth and development of socially or economic disadvantaged firms has always been vital
to strengthening the state’s economy. MSBDFA is tlic State of Maryland's primary vehicle for
providing financing to minority and women-owned businesses. MSBDFA has provided over
80% of its debt, bonding, loan guarantees and equity financing to minority and women-owned
businesses in Maryland. During the past 5-year period, MSBDFA provided $37.5 million in
Financing to HI transactions. Its total exposure was $29.2 million. 80% of the number of
financings, or 73% of the dollars were provided to minority-owned businesses. 24% of the number of
financings were provided to women-owned businesses, while 1 8% of the dollars were used to assist those
businesses.

During the 10 year period from 2000-2009, the state invested $21 million into MSBDFA. This
investment generated $140 million in local and state tax revenues. This is a return on
investment, after loan losses, in excess of 600% or 6.6 times the investment, 'fhe estimated
Economic Impact on Maryland was:

1. $3.4 billion in sales;

2. $1.04 billion In income;

3. 3,007 full-time equivalent jobs;

4. $109.0 million in state sales and personal income taxes; and

5. $31 .0 million in local personal income tax i-eceipts - a combined total of
$140.0 million.

Stanley W, Tucker, President
Meridian Management Group, Inc,
Page 3 of 4

Demographic Trends for Minorities in the Maryland:

According the Maryland Department of Planning, the total population in Maryland in 2010, was
5,7 million. By 2015, it is projected to increase by 4% to 6 million. By 2020, it is projected to
increase an additional 4% to 6.2 million. The ethnic minority population in Maryland in 2010
was 45%. By 2015, it is projected to increase to 48%. By 2020, it is projected to be 50%. By
2025, it is projected to be 52%. The Maryland K through 1 2 public school enrollment is
currently majority minority. The female population over 16 years of age in Maryland in 2010
was 42%. Through 2025, it is projected to remain 42%.

We must pay attention to the new demographics. These demographic trends impact critical areas
such as education, employment, housing, income and businesses.

Current Status of Minority Business Enterprises (MBEs):

Based on the latest census, there are 509,273 firms In Maryland, of which 32,2% (164,130) are
minorities. The gross domestic product (GDP) in Maryland for all firms in 2013 was $342.3
billion, of which minority businesses represent 9.6% ($32.7 billion) of the GDP. There is a
major difference betw'een the number of minority firms and their percentage of the GDP.

Importance of MBEs to the State:

According to the Governor’s Office of Minority Affairs 2013 Economic Impact Report, the
contract payments from the State to MBEs have:

> Created or saved 26,796 jobs

> Generated $1.1 billion in wages and salaries

> Generated $88.9 million in state and local tax revenues

If w'c double the GDP percentage generated by minority-ow'ned firms, it is estimated it that
MBEs would generate:

> $32 billion to the Maryland economy

> 53,592 new jobs, the majority of which would benefit the minority community
'>► $1 77,8 million in tax revenues

As we grow these businesses we strengthen the economy and strengthen the economic base of
minority communities by hiring people from minority communities.

Stanley W. Tucker, President
Meridian Management Group, Inc.
Page 4 of 4

Access to Capital;

Minority-owned businesses continue to be the engine of employment in emerging and minority
communities. For minority-owned firms to flourish there is a strong need for adequate capital
for the firms to realize their full potential.

Business growth depends on a variety of capital, from seed funding to establish new firms, to
working capital and business loans to expand their businesses, to private equity for acquiring and
merging with other firms.

Numerous disparities studies have shown that Minority and women-owned firms are less likely
to receive loans than majority owned firms and receive lower loan amounts than majority owned
firms.

Among firms with gross receipts under $500,000, loan denial rates for minority firms were about
three times higher, at 42 percent, compared to those of non-minority-owned firms, 16 percent.

For high sales firms, the rate of loan denial was almost twice as high for minority firms as for
non-minority firms. Minority-owned firms also receive smaller equity investments than non-
minority firms. The average amount of new equity investments was $3,379 for minority firms
with low sales, which is 43 percent of the non-minority level. The average amount of new
equity investments was $7,274 for minority firms with high sales, which is 38 percent of the non-
minority level. (The source of this data is the Minority Business Development Agency).

Conclusion:

Minority-owned firms are less likely to receive loans than non-minority firms and receive lower
loan amounts than non-minority firms.

Maryland’s minority and women-owned business community has a positive economic impact
that provides a great return on the State’s investment.

Minorities are becoming a majority of the Maryland population. This is a nationwide trend.

Research shows that minority-owned businesses hire a larger percentage of minorities. Minority
businesses are also more receptive to employing ex-offenders.

As the minority population steadily increases, the number of minority-owned firms will flourish
as well. Due to this growth, there is a strong need for adequate capital for the firms to realize
their full potential.

Senator Cardin. Let me acknowledge that I am joined by my col-
league, as I indicated earlier, Donna Edwards. She is an incredible
effective, active person in the House of Representatives on these
issues. She has been fighting for minority financing and for eco-
nomic development in distressed areas as one of the national lead-
ers on the Transportation Committee and in the leadership of the
House of Representatives.

Congresswoman Edwards, would you like to make a comment.

OPENING STATEMENT OF HON. DONNA EDWARDS, A U.S.

REPRESENTATIVE FROM MARYLAND

Representative Edwards. Well, first of all, thank you very much.
Senator Cardin, for being here, and particularly in Prince George’s
County, and to our witnesses today.

Several of our witnesses I have had an opportunity to work with
over the course of several years on these very issues, both with mi-
nority-owned businesses at large but also women-owned busi-
nesses, Hispanic-owned businesses, where we know, as Mr. Tucker
has already stated, that there clearly is a demonstrated record of
success of these businesses. And so we have to get — we have a
challenge of getting over the hurdle that does not enable minority-
owned businesses to thrive in the same kind of robust way.

And how fitting. Senator Cardin, that we are here in Prince
George’s County because we know that there is robust small busi-
ness development and entrepreneurship going on here in this coun-
ty, and if we can figure out the way that we can take some of those
businesses from the place that they are and really provide the kind
of robust resources, technical development, that they need and that
they want, and expose them to business opportunities that others
of our businesses face, we know that that will double and result in
a benefit both to our local economy, to our State’s economy, and of
course, to the national economy.

And so I want to thank you very much for bringing these impor-
tant issues, and I look forward now to joining in some questions
with Senator Cardin at the lead of our witnesses today.

Thank you very much.

Senator Cardin. Well, thank you. I appreciate those comments.

Let me turn to Shelly Gross-Wade, the President and CEO of
ESC First. ESC First is a preferred alternative lender under the
SBA 504 Commercial Real Estate Loans, the Small Business Com-
munity Advantage Loan Program, the State of Maryland Microen-
terprise Loan Program, City of Bowie Revolving Loan Fund, and
the Prince George’s County $50 million EDI Fund.

It is a pleasure to have you with us.

STATEMENT OF SHELLY GROSS-WADE, PRESIDENT AND CEO,

FSC FIRST

Ms. Gross-Wade. Thank you. Senator, and my sincere apologies
for being a little bit late.

I am indeed happy to be here to, first of all, as Congresswoman
Edwards, welcome and thank you for bringing this opportunity to
Prince George’s County.

Secondly of all, I am very close to the grassroots businesses in
Prince George’s County. As a quasi-government agency, FSC First

has just within the last week or so conducted a focus group of small
businesses within Prince George’s County. We extended the invita-
tion to business owners who were familiar with, and unfamiliar
with, the plethora of services that we offer at FSC First.

So I am happy to share with you some real-world feedback that
we have just gleaned from these businesses based on where they
are at this point in their business operations, as well as what they
would like to see as resources available to them, so that they can
continue and thrive and grow not only in Prince George’s County
but globally.

FSC First, as I have mentioned and as you have already noted,
is a 37-year-old nonprofit organization in Prince George’s County.
We have had the distinct designations of being a CDFI through
Treasury as well as a community development, or certified develop-
ment, entity participating in the SBA 504 program.

When we look at the profile of businesses that we have assisted
in their development, we have loaned funds to companies that are
both startups as well as growing and expansion companies. We
have helped those that are attracted to the county as well as those
that are in a rapid growth mode and may be facing some chal-
lenges.

The difference between us and other lenders is that we spend a
lot more time with these business owners, providing them with ac-
cess to technical assistance as well as access to alternative sources
of capital.

And one of the things that has become very evident to us is the
business community, in particular, is in need of increased and en-
hanced business acumen. Our business owners know their products
and services very well. They struggle with taking their business to
the next level of growth, and that suggests to us that they are in
need of technical assistance, more in-depth technical assistance.

And so we are familiar with, and have utilized, the SBA’s funded
small development services, center services. We also use other re-
source partners like the Maryland Women’s Business Center,
which is also federally funded. We have referred business to the
Bowie Business Incubator.

And, however possible, we try to attract and partner with those
technical assistance providers to make sure that businesses have
access to subject matter experts that can help them delve a little
bit deeper into connecting the dots from “I have a product or serv-
ice to offer that generates revenues” to “How do I generate the next
level of revenues and growth strategies for my company.”

Interestingly enough, in the focus group, a couple of businesses
mentioned that what they want and need more than anything else
is business coaching, preferably from subject matter experts like
the Service Corps of Retired Executives, SCORE, but more one-on-
one type of assistance as opposed to classroom training. They really
emphasized that coaching and mentoring is something that they
feel very strongly would be the level of technical assistance that
would help get them to the next level.

So where are we as far as providing access to capital? At FSC
First, we make loans that range from $5,000 to $5.5 million, using
the SBA 504 program.

However, the average loan that we have seen in our portfolio has
been at $178,000, which suggests to us that we are meeting people
at their point of need. We rarely see businesses that come to us
that cannot meet the definition of small business as defined by
SBA.

However, I would suggest that about 75 percent of those busi-
nesses that come to us on an annual basis would not be prepared
to gain access to capital. They really do not understand the depth
of capacity that they need to calculate the amount of funding that
they need nor to calculate their ability to repay.

And so while we might have many, many different types of fi-
nancing sources available — my colleague, Stanley Tucker, talked
about making sure that there is equity funding available and mak-
ing sure that the sources of venture capital are more — have a
broader perspective on what they invest in.

We also see that those businesses that come to us could benefit
from additional funding sources but are not yet prepared. And so
the step for FSC First is to prepare them so that we can take ad-
vantage of where they are now and prepare them for greater fund-
ing as they move on to traditional lenders.

And I will stop there and save the rest of my remarks for the
question and answer period.

[The prepared statement of Ms. Gross-Wade follows:]

SHELLY M. GROSS-WADE, PRESIDENT & CEO

Good Afternoon

I am Shelly Gross-Wade, President & CEO, of the Prince George's Financial
Services Corporation {aka FSC First). For more than 37 years, FSC First has
served as the premier lender of non-traditional financing for local small and
minority-owned businesses in Prince George's County and indeed the State of
Maryland.

It is my esteem pleasure to serve on today's panel at the invitation of
Senator Ben Cardin, the Ranking Member of the U. S. Senate Committee on
Small Business & Entrepreneurship. The timing of this presentation could not
be better for our economic development finance organization and our business
community.

Within the past week, the Board of Directors of FSC First hosted a Focus
Group of Business Owners to identify some of the key challenges faced by small
businesses in the County - not the least of which was their concern for access to
capital. There is a perception that dealing with banks (lenders), in general, is an
extremely protracted process. According to participants in the Focus Group
which represented diversity by ethnicity as well as company revenue size,
number of employees and revenue size; it was shared that in regards to
banking, African American [business owners] are often paralyzed when it comes
to accessing loans and other financial services from bankers.

One participant described their process as difficult to surge growth when
it takes 6-9 months for a credit decision, especially when the decision is reached
based more on the qualifications of the owner and less on the business, the
industry, the services and needs being met in the marketplace. The other
problem that was alluded to was gaining access to capital in general. Another
business owner described the critical need for the lender to understand the
business operating cycle and how important cash flow is to their sustainability -
again, demonstrative of the need to change the paradigm for credit analysis so
that it is more reliant on the future growth potential of the company rather
than their past operating history - which is often indicative of inadequate
capitalization. More importantly, all of the participants participating in the
Focus Group expressed a need for business coaching and mentoring - what we
in the economic development community refer to as Technical Assistance (to
include training).

' PRINCE^GEORGE'S FINANOAL SERVICES CORp'6rATK)n1f^ FIRST)

I March 16, 2015 - Field Hearing; Written Statement
I www.fscfirsl.com
I (301)883-6900

SHELLY M. GROSS-WADE, PRESIDENT & CEO

As a Community Development Finance Institution (CDFI) we, at FSC First,
take pride in our ability to operate a nimble organization. CDFI's are
encouraged to remove barriers to credit (to the extent possible) - to take on a
little more risk, as well as implement innovative and creative approaches to
providing access to capital in the community we serve. We operate a best-
practice model for a public-private partnership in our approximately $4 million
revolving loan fund. The loans offered through our revolving loan fund range
from $25,000 to $350,000; at market rate and terms of up to 10 years,
depending upon the use of loan proceeds.

As a Microfinance Lender, we offer loans that range from $5,000 to
$25,000; with very creative terms, rates and conditions.

Also, we serve as a Lender Service Provider - offering loan administration
services and for municipal and non-bank lenders. For example, we manage:

4- $200,000 City of Bowie RLF

$200,000 MD DHCD MicroEnterprise Loan Fund (sustainable
communities)

*4 $500,000 Economic Development RLF

4 $8.5 MM HUD 108 RLF; and the County’s signature program -

4 - $50 MM EDI Fund

All of these programs are designed to work in tandem with each other
and finance every conceivable capital need that a Minority Business might have:
day-to-day working capital, marketing, payroll, modernization of the facility and
upgrade of the equipment, acquisition of commercial real estate, land for
expansion purposes. They are also designed to participate in a subordinated
lien position with traditional lending products; thus allowing the lender to take
a priority lien interest in the accesses of the business being financed.

At FSC First, these programs have been used to finance all types of
industries and business sizes. We rarely decline a business because it does not
meet the SBA definition of a small business - which varies from industry to
industry, by NAICS Code.

:E GEORGE’S FINANcTaL^^JCES CORI^RMION (FSC FIRST)
^ March 36, 2015 - Field Hearing: Written Statement

i www.fscfirst.com
(301)883-6900

SHELLY M. GROSS-WADE, PRESIDENT & CEO

Finally, as a Certified Development Company (CDC), we are designated by
the U. S. Small Business Administration to market, analyze, underwrite, close,
fund and service long-term fixed asset loans under the SBA 504 Real Estate
Acquisition Loan Fund anywhere in the State of Maryland. This program is
designed to assist any eligible company with transitioning from a leased facility
to an owner-occupied facility. The benefits are tremendous - if you are buying
fixed assets, e.g. machinery - the SBA 504 portion of the transaction has a fixed
interest rate for 10 years. Of course, if you are buying a facility, and intends to
occupy at least 50% of it for your revenue-generating business, you would
benefit from a below market, fixed rate mortgage for 20 years. A major feature
of this program is that the mortgage is assumable should you decide to sell the
business assets. This program is great for building legacy wealthy for the
business and its owners.

Recognizing that Minority Business Owners have been historically
disadvantaged to meet the minimum equity requirement - typically 10% of the
total project cost, FSC First will work with the business owner to identify
additional forms of debt that will serve as the equity in the SBA 504 transaction.

We accept the challenge to identify other sources of capital that can be
stacked to support the viability of the transaction.

Other forms of capital, that would need to subordinate to the SBA 504
portion of the loan transaction would include;

4- Sellers take-back note
4- Owners equity

4- Subordinated debt (public and private sources)

4t- Grants and Tax Credits

Creating Economic Impact

4- $21.4 Million under management
4- Less than 1% default ratio in the loan portfolios
■4^ 2,015 jobs supported over the past 4 years
4- 60% increase in Approved Loans/Pending Closing as of
6/30/14; totaling $13.5 Million
4- 43% increase in Loan Commitments over prior year;
supporting new Commitments of $9.2 Million

PRINCE GEORGE'S FINANCIAL SERVICES CORPORATION (FSC FIRST}
March 16, 2015 - Field Hearing: Written Statement
www.fscfirst.com

SHELLY M. GROSS-WADE, PRESIDENT & CEO

From the non-traditional lenders perspective, here are the challenges
business owners present that impedes their ability to gain (timely) access to
capital :

1. Lack of awareness of the availability of ca pita! - sources and uses

2. Lack of preparedness to access the capital sources

3. Limited knowledge about threats and opportunities in the
marketplace

4. Inability to maintain and share quality financial information on the
business in a timely manner

5. Resistance to transparency

6. Inability to meet the lenders conditions to proceed to closing

7. Lack of performance (reporting conditions) post-closing

8. Lifestyle challenges

Non-bank lenders, like FSC First, serve to provide gap financing. We serve
as your intermediary lender until such time as you are qualified for or can meet
the performance requirements of a traditional lender, venture capitals or equity
fund. Typical terms are 3-5 years; but terms may extend up to 10 years for non-
real estate loan transactions and up to 20 years on commercial real estate.

Our goal is to serve as a mission-driven lender - with the primary mission
being to provide access to capital (either directly or indirectly) to eligible
businesses. We are committed to assisting the business owners with qualifying
for traditional financing (extended lines of credit, letters of credit, term loans,
first trust mortgages, etc.) at levels that sustain the growth of the company.

The advantage to working with a non-bank lender, like FSC First, is that
you may also receive wrap-around, our holistic, services in the form of technical
assistance, licensing and permitting, training, coaching and mentoring. Unlike
an equity investor, we typically take no ownership interest in the business, but
determine its viability based on the short- and long-term economic impact to be
realized as a result of the funding we provide.

In conclusion, we welcome the opportunity to work with sustainable
businesses and have a goal of lending $6.8 Million through June 30, 2015. FSC
First is accessible in person, by voice, email and the worldwide web at
www.fscfirst.com.

^ I PRINCE GEORGE'S FiNA^UrSE'RVICESa3Rra^TION {FSC FIRST)

I March lb, 2015 -Field Hearing: Written Statement
I www.fscfirst.com
I (301)883-6900

Senator Cardin. Well, thank all of you for your comments. I
think it has been extremely helpful.

And, as you know, the hearing record will be available to all the
members of the Congress. So this will be part of the work of our
Committee and part of the work of the House and the Senate.

Last Friday, I was at the Census Bureau. I was there to support
the President’s request for the resources necessary that we have an
accurate census and it is done in a most cost-effective way. You
need information in order to be able to make the right decisions in
not only our government but in our country. So the census work
is critically important.

I say that because I was listening to your testimonies.

Ms. Castillo, you mentioned the fact that the private sector lend-
ing is equally important and, in some cases, more important than
what is happening in the government sector.

Mr. Hairston, your comments sort of connected the dots for me
about why our minority businesses are harder hit in recessions.
And you pointed out — and I did not realize — that they are more de-
pendent upon their personal residence equity for loans than the
nonminority community.

Ms. Castillo. Right.

Mr. Doss. Absolutely.

Senator Cardin. And I wonder if we have really good data to
show that.

And then, Mr. Tucker, your point about reentry really hit home.
I mean, that is one of the high priorities of our country, and if we
had that data to show, we may be able to get additional resources
to minority businesses because of their activities in hiring ex-of-
fenders.

So it seems to me having adequate useful information on minor-
ity businesses and small business activities is critical to make the
right decisions.

And I know we have a lot of material that is made available, and
I get a lot of reports. But is the data we currently have in the most
useful form in order to help minority businesses gain access to the
type of capital that they need?

Ms. Castillo. So if I may. Senator, as you know, the U.S. De-
partment of Commerce Census Bureau, we do the survey of busi-
ness owners. That is done every five years. The new data will be
coming out in June, which is critical.

And the Department is working very diligently to see how we can
actually roll out the data more quickly and is also partnering with
the Kauffman institute in making sure that the data is provided
in much more real time, if you will, because you are absolutely
right. You can only — as the saying goes, you can only manage that
which you measure, and measuring and being able to actually have
much more robust information.

Now I will tell you that MBDA, as we commission different re-
ports, it is precisely because of that — because we want to bring that
data in a way that is more digestible and that really tells the story.
So, when I talked about our disparity in access to capital report,
that is the type of information that is gleaned through that type
of much more in-depth research.

We are developing a three-year agenda, a research agenda that
will help provide more information to all of these practitioners, if
you will, and have more data that is more compelling. We know the
information kind of instinctively, but when you see it, when you
can actually see the charts, see the economic impact that this has,
it is very persuasive.

Senator Cardin. I think the more — I mean, showing how many
minority businesses have to put their homes up for collateral, to
me, would be a very telling situation.

Mr. Tucker. Could I speak to that for a minute. Senator? You
will find that is pretty high.

Ms. Gross-Wade. Yes.

Mr. Tucker. But let’s talk about the data. I think the data is
critical.

The data that Ms. Castillo talked about, the census data, etc., is
very, very good data and what has been used over the years. But
what happens with that data also is by the time they collect it and
they actually publish it, there is an extensive period of time.

Let me suggest this: It is something that we are trying to do, and
we have been working with Dr. Timothy Bates, who is probably the
top person in the nation in this minority business piece. He has
done extensive research in this area.

And Tim — I mean Dr. Bates — has said, and what we have been
trying to do, is that the data that is collected nationally in the cen-
sus, with regard to minority businesses and small business as well,
that same data is actually collected annually at the state level.
Okay?

And so what we are trying to do is get access to that data at the
state level, and Dr. Bates is trying to get access to that data at the
state level. They are looking at California and Maryland. I know
because Tim and I go way back.

And so we are trying to modify the law in Maryland at the state
level so we can get that same data annually, okay, because what
happens is, and the challenge is, that these various minority busi-
ness and women business programs — they are being challenged.
And we must have the data, up-to-date data, okay, to beat back the
challenges.

The census data is good. However, sometimes it is dated. Okay?

But if we could get this data — in Maryland, it is called ES-202.
Okay? And we want to modify that language so we can get this
data to the researchers.

As a matter of fact. Senator and Congresswoman Edwards, we
were having some challenges and still have some challenges in
Maryland, trying to modify this data.

So what happened — there is a gentleman at the Department of
Labor, Bureau of Statistics who said — because they have so much
confidence in the research of Dr. Bates and his team, said that they
will cover the costs. It would not cost Maryland a dime to collect
this data. That is how important they feel it is that we get access
to that data.

This really needs to be done nationally. Okay? But we want to
have some pilot projects.

And we need some assistance on that so we can get that lan-
guage modified at the state level so that that data can be collected

annually and then use that data to undergird, if you will, the mi-
nority business programs in Maryland but also use it as a model
for the nation.

Representative Edwards. Senator Cardin, if I could follow up.

Senator Cardin. Sure.

Representative Edwards. Let me just follow up with that be-
cause I remember when we passed the American Recovery and Re-
investment Act and a lot of that money went into research, went
into transportation. One of the challenges that I found on our
Transportation Committee is getting reports back about how much
of those significant Federal dollars went down and out to minority-
and women-owned businesses.

And one of the big challenges was that there was not a required
reporting mechanism from the state to the Feds so that they could
report back to Congress. And as a result, it was very difficult, ex-
cept in some ways with states that were better at reporting than
others, about where those resources went and how we could better
direct some of them to minority-owned businesses.

And so I want to ask you, especially in some untraditional sec-
tors, like transportation, like research and technology, how it is
that we could function as a Federal Government in our oversight
capacity in the Congress and try to tease out some of that data so
that it becomes more useful for doing the right thing.

Mr. Doss. If I could add just a moment on the same topic with
data, at the Small Business Administration, of course, we have our
Office of Advocacy, which works very closely with the Department
of Census and collects and uses a lot of the information that is pro-
vided by the Census Department. It is valuable information for us,
for our business owners, for the general public and our agency in
terms of understanding what the needs are, what the situations
are that exist with businesses, and we use that data on a regular
basis. We have an annual update even to our small business pro-
file.

We always will welcome the opportunity to have more data, par-
ticularly as it relates to minority and small businesses, as we try
to better understand the impact of both of those groups on the
economy because we are interested in growing the economy very
much locally, whether it is here in Bowie or somewhere in Prince
George’s County or at the state level.

But being able to see what the impact of those small businesses
is in terms of helping to drive the small business sector and the
economy in general is something that we are interested in.

Representative Edwards. Because wouldn’t it help if, for exam-
ple, the SBA knows that we are doing a lot of job creation in the
areas of research and technology, but our small business loans that
are coming are in some of the service sectors?

Would it help you to be able to make an argument to an M&T
Bank, for example, or to a venture capital investor that it makes
sense to make loans in those sectors where we are growing the
economy and we are growing resources so that we can then spread
out some of those opportunities into the future?

And I would ask that of M&T Bank.

Mr. Hairston. Sure.

Representative Edwards. What would you need to know to make
a better business decision about making a loan to a small business?

Mr. Hairston. Absolutely. We are fortunate now where we are
able to get a sufficient amount of information from the Small Busi-
ness Administration because we are literally able to see, by various
minority categories and groups, what percentage of our lending is
actually being directed to those respective groups.

To go back to one of the questions and the points prior, I think
one of the pieces that it seems that the SBA would be able to pro-
vide is what percentage of those minority borrowers did we have
to lever their personal residences. All that information is absolutely
available.

When I look at this geography, I would definitely say whether it
is minority borrowers or majority borrowers, having worked for
M&T and other parts of our footprint where the businesses are
more capital-intensive manufacturing, this geography — I will tell
you, having been in the Mid-Atlantic with M&T, both in Baltimore
and now in the National Capital area, it is absolutely a higher pro-
portion, both minority and majority, where you have to lever their
residences just based upon the larger percentage of the businesses
being more professional services-oriented, whether they are govern-
ment contractors or non-government contractors, because you do
not really have other collateral that you can rely upon.

With that being said, I absolutely believe there are opportunities
as you think about the technology. We have struggled with the
technology piece because when we look at technology companies we
sort of look at them on a continuum and many technology compa-
nies do not fall into that category in the early stages where they
are targets for debt capital. They are largely looking for equity cap-
ital.

We challenge — we are challenged, you know, to really under-
stand who are all the providers out there that can work with them.

Being a highly — being in a highly regulated industry, you know,
we have to be able to — as Shelly referenced, we have to be able to
show that — whether we are going to try to get an SBA guarantee,
we still have to be able to show that they have got a track record
or, if they do not have a record, that they have the ability to imme-
diately generate revenue that will turn and provide an ability to
pay whatever that debt is. That is typically a challenge for most
of your technology-oriented companies in this geography.

So partnering and working with the types of organizations that
can fill that equity gap is really still an area that is still not — and
especially in the State of Maryland, I think there are some strides
that have been made, but there are still significant challenges
there.

Senator Cardin. So let me follow up on these issues.

Mr. Doss mentioned many of the tools that the SBA has imple-
mented in order to try to help minority businesses gain access to
capital. So I particularly would be interested in, Ms. Gross-Wade
and Mr. Hairston, since you work directly with borrowers, whether
these tools are working as well as they could and the priorities.

Mr. Doss mentioned the fact that the SBA loans under 250 — no.
The SBA loans under — was it $150,000 where there is no fee?

Mr. Hairston. Correct.

100

Senator Cardin. Where the fees are actually subsidized by the
other borrowers because this is a zero-sum game, if I understand
correctly, but that that has increased the volume. So the initial
costs being a little bit less has had an impact.

The micro loan program, which has a very high concentration
within minority businesses.

The SBA Community Advantage Loan Program, which was a
pilot initiation for loans.

The simplifications procedures through the internet, whether it
is the LINC program or the SBA One that is going to be initiated
this year and has not started yet.

The credit rating simplification.

And I have not mentioned the 504, the SBIC, and the other pro-
grams we have available.

Could you handicap for us whether — how effective these pro-
grams are and whether they could be more effective?

One of the things we have to talk about in government is that
we just cannot layer program upon program upon program. We
have got to make sure that we have the most effective use of the
government tools to deal with the issues.

Which are worth further investments here?

Ms. Gross-Wade. If I may, I think the Community Advantage
Program is one of the best financing tools that have come out of
the SBA in a very long time. It allows for us to put the money out
on the street at a much faster pace than the traditional SBA prod-
ucts.

I think that the ability to know going into the deal that you are
going to have an SBA guarantee at a certain level helps you in
structuring the deal, as a non-bank lender.

And we are one of your CDFIs that is a Community Advantage
Lender. We are just now getting ourselves up on the learning curve
with how best to deploy that tool. We are striving to become a dedi-
cated or designated Community Advantage lender, which would
give us some unilateral authority in the types of loans that we un-
derwrite and use the SBA guarantee on.

But is it efficient? Yes.

Is it effective? Absolutely. Everything that we are looking at now
we are looking at first to see if it is going to qualify for Community
Advantage.

I will also tell you that while you have standards for evaluating
those credits there is a great deal of latitude given to the lenders
on how to defend the request for the borrower.

So I am particular, both personally and professionally. I am a
strong proponent of Community Advantage.

The range is from $5,000 to $250,000, and that seems to be our
sweet spot, with us being a revolving loan fund.

Senator Cardin. And that is so valuable because it streamlines
and makes it faster and more predictable.

Ms. Gross-Wade. Yes, yes. And the turnaround time for us has
improved significantly. I mean, we are able to get those deals un-
derwritten and transmitted electronically to the SBA so that we
have a credit that is well-packaged, underwritten, approved, and
received the SBA guarantee in less than two weeks, which means
we can go to closing and fund in a much shorter period of time.

101

Mr. Hairston. And I would add the complement to the Commu-
nity Advantage Program, which is a program that the SBA rode
out in the most recent fiscal year, is the Small Loan Advantage
Program, which is designed for financial institutions, for credit re-
quests as well, $5,000 up to $350,000.

I have to tell you we are huge fans of the Small Loan Advantage
Program and the benefits, the efficiency of it, not just from the
process time. The reality is we want to get the loans closed as
quickly as we can.

And what you would see — and the data would show that many
of the minority borrowers really fall into that space

Ms. Gross-Wade. Right.

Mr. Hairston [continuing]. From a traditional lending stand-
point, where the Small Loan Advantage Program really does ade-
quately meet their borrowing needs under that program.

And when they do not, we can then go to the traditional 7(a) pro-
gram, which — you know, they have streamlined it. With that being
said, they continue to look for more opportunities to make that pro-
gram even more efficient.

We are fortunate because we are a preferred lender. So we have
the unilateral authority to act on behalf of the SBA.

But I would definitely tell you the Small Loan Advantage Pro-
gram has been very beneficial. Our average loan size at M&T is
about $148,000. So we really cater to your average, typical small
business that has been in existence typically for three years or
more, and that program really does meet the needs from that
standpoint.

The challenge, once again, that even under that program that we
still have is when there is a collateral shortfall and how do we fill
that.

So, if we can work to partner with other organizations where we
may have that collateral gap and fill those needs, I think that is
an opportunity to really drive more of that minority lending, which
is really necessary.

Representative Edwards. Let me just ask whether — on the 7(a)
program, because those are loans that are under $150,000, how
much the fee waiver provisions contributed to the increase in those
loans and the ability to get those loans out.

Mr. Hairston. Yeah. When it first rode out, during that initial
fiscal year, we saw a 21 percent increase in volume in the space
of $150,000 and under.

So we are absolutely proponents of it. We are strongly in favor
of continuing the waiver because the reality is in the way that we
manage this; those loans that are extended to those borrowers that
are $150,000 and under, they are more like consumers. They think
more like consumers.

So, when you approach them — and that guarantee fee under the
express program could be, you know, I say as little as $750. But
when you are talking to somebody who thinks more like a con-
sumer and they can get a credit card where there is no up-front
fee, it does not matter that the rate could be 18 percent all in.

And even on the SBA side, you can do prime.

And even, let’s say on the high end as prime plus 5. Prime plus
5 would be 8 and a quarter.

102

Because they do not have to pay that up-front fee of $750, they
will go with the credit card instead of going with the express loan.

Ms. Gross-Wade. Right. That is an interesting point, if I may
piggy-back on that.

Out of the focus group session that we had over a week ago, it
was very insightful to us that most of the business owners were not
at all adverse to having a higher interest rate. They wanted to
know that the funds would be available at the time that they need-
ed.

Mr. Hairston. Yes.

Ms. Gross-Wade. There was no criticism or concern at all about
the cost of money.

And so that was a new reality for us, if I may put it that way,
because the perception as a lender is that we try to be very cog-
nizant of the fact that we are making loans to businesses that are,
in most cases, pre-bankable. So we want to be very sensitive about
what interest rate we give them.

And they are saying, we do not care what the interest rate is;
we just need to have access to the money.

And the other reality is whatever the interest rate is that we
propose to them as an SBA lender, as a government-backed lender,
it is still going to be a lot less costly than a credit card rate. Yet,
many of the businesses that we see come in with exorbitant credit
card debt that they would like to have refinanced.

And those rates are almost prohibitive

Mr. Hairston. Yes.

Ms. Gross-Wade [continuing]. For us to even take that debt out.

Representative Edwards. Thank you.

Ms. Castillo.

Ms. Castillo. I would like to join in and maybe broaden the con-
versation as well because MBDA focuses on growth. How do we get
businesses, not just at the small end of the spectrum but also get-
ting them, moving them, through the growth spectrum.

So going back to what Ms. Wade was saying, the lending tools
are critical but making sure that these businesses are ready, that
they understand all the financial that they need to have available.

I will also submit to you that lending also depends on the indus-
try that you are in. Transportation, construction, for example, a
surety bonding is a huge issue.

On the exporting side, we work very closely with Ex-Im Bank to
make sure that we are getting more minority businesses, who, by
the way, are twice as likely to export than nonminority firms, to
access the opportunities that exist either through Ex-Im Bank,
OPIC, or others.

So I just want to make sure that as we talk about minority busi-
nesses that we are looking at minority businesses just not at the
small level but how do we help them grow. That is where the job
creation comes in play. That is where the tax revenues are going
to grow. And that is really where the future of the country is going.

It is making sure that we have all of those tools at every life —
at every point of their life cycle.

Senator Cardin. It is the reason why the SBA administrator is
so much in favor of Ex-Im Bank reauthorization.

I was at a small business in Baltimore that is absolutely vital.

103

And your point about minority businesses and exports is a very
good point. As we talked earlier, a lot deals with the fact of the di-
aspora community. They have contacts and can get — make those
contacts work for commercial ties. And it is an area that is cer-
tainly underutilized and one that we need to move forward.

I have one last question, and then I will let Congresswoman
Edwards talk about her issues.

That was a Freudian slip

[Laughter.]

I better — for the sake of Chris Van Hollen, I better correct the
record or I am going to get in trouble with my other colleagues.

There is — as you know, there is a desire to increase the cap on
the 7(a) loans. It does not cost any money because they are offset
with the cost. But it would go from about $18 billion to $23 billion,
and I think all of us support that. The volume needs are there.
Why don’t we meet those needs?

I was just interested as to whether we have an indication wheth-
er by raising that cap it will be more beneficial to minority busi-
nesses than the general population of small businesses or whether
it would probably have no major impact on how the allocations are
being made between minority and nonminority small businesses.

Mr. Hairston. I would immediately add, you know, if we look at
the data for M&T just in the most recent fiscal year. So 45 percent
of the loans that we extended in fiscal year 2014 went to minority
borrowers. So, even if we just looked at that data.

And I remember when there was the potential for a delay with
our SBA processing, and we literally, four weeks prior, sort of sent
a message out throughout the institution. You know, try to push
these loans through as fast as you can because, potentially, we may
have a delay and we do not necessarily know how long that will
last.

The reality is if we were consistent and we ran into an issue with
the cap you could say that 45 percent of our borrowers would not
be able to access capital.

Senator Cardin. That is helpful.

Mr. Tucker. Let me — two things, two points I want to make be-
cause we manage state funds.

And one of the things we did, it was somewhat — it is actually
still unique in the country. We wound up privatizing the manage-
ment of the fund, and when we privatized the management of it,
it gave us a lot more flexibility in terms of bringing different kinds
of capital to the table.

Then we were able to leverage some of our dollars, to leverage
our specialized small business investment company.

We were able to — we came up with the idea of putting language
in the gaming bill where 1.5 percent of the gross revenues would
go to a fund to invest back into small minority- and women-owned
businesses.

So we were able to do a number of things.

Actually, I made a recommendation to the SBA administrator
about maybe 10 or 15 years ago. I said, you know what I think
would be interesting? If you privatize SBA and see what happens
and if folks have to really, really pay their own way, if you will,
in terms of what they do.

104

But also, in terms of dealing with your question, one of the chal-
lenges minority- and women-owned businesses have is capacity,
and the quickest way to get that capacity is to buy it. People do
it every day.

Over the next 10 years, all the baby boomers in the country are
going to sell their businesses. The question is, who are they going
to sell them to?

So, in Maryland, we are looking at introducing legislation that
says this:

If someone sells his or her business to a minority or a woman,
one, the profits they make off of that sale, they would not have to
pay state taxes, one.

Two, if someone makes an equity investment in the transaction,
they will be able to get an investment tax credit up to a half a mil-
lion dollars.

Three, if the owner hangs around and helps with the transition,
whatever salary they receive, they will get a special tax treatment
on that.

And, four, if the owner helps finance the transaction, they will
get a special tax treatment on that.

So what are we trying to do? We know these businesses are
going to sell because their wealth is tied up in these businesses.
The question is, who are they going to sell them to?

So we want to create an environment where they will sell them
to minority- and women-owned businesses. So now they get back
a pass — and here’s the other thing that’s very important.

One, we keep those businesses in the State of Maryland. The
sellers, usually when they sell, what they will do is they will go to
Florida, establish residence, come back to Maryland, sell their busi-
ness, and get the first plane back to Maryland — back to Florida.

So we want to keep them here. We want to keep those businesses
here. And now as they become owned by minority- and women-
owned businesses, they get the minority- and women-owned status.
They can grow their businesses.

We have done several economic impact analyses which show that
if, in fact, this legislation was in place it would be a net positive
to the State of Maryland.

And SBA in acquisitions, SBUs and SBA with guarantees to
banks and what not, help with financing these businesses. So ac-
cess to capital, again, becomes a critical part of these acquisitions.

We are very excited about it. We think we are going to be able
to get it through. We did not introduce it this year, but next year
we probably will.

Senator Cardin. Good point. Well, before I make some final com-
ments, let me turn it over to the Honorable Donna Edwards.

[Laughter.]

Representative Edwards. Thank you very much. Senator Cardin.
And I really do appreciate your being here today because I think
over the course of my, you know, last several years of service in
the Congress we have had a number of events in my congressional
district that are really targeting various sectors of our widespread
minority-owned business community and small business commu-
nity.

105

And I think some of the challenges that I have heard are clearly
the businesses that are on the smaller end. They are start-ups.
They are the ones that Mr. Hairston referred to as sort of con-
sumer-oriented. And so we have a set of programs that are impor-
tant for those.

But I want to go back to Ms. Castillo’s point, and it is that we
have to also figure out a way that as we get these businesses, you
know, started and they are growing and they are developing, what
is the thing that we can do — what are the things that we can do
that jumpstart those businesses, that take them to the next level,
that makes them both regional and transnational competitors but
also makes them global competitors?

And I have in my mind one small business that I — what started
out to be a small business that I know really well. A couple of guys
working in the space industry, who decided that they were going
to jump off and start their own little firm, and they did. And so
they became 8(a)-qualified, which was really great.

And then the challenge — and Mr. Doss knows this — was how do
you go from there to competing in a wider marketplace and grow-
ing your business? And this business did that.

And I am not going to name the names because I think I am
looking at him right outside my right eye.

But then they grew, and now they are transnational competitors,
and they are global competitors. And they are minority-owned busi-
nesses — businesspeople. And they started out at the ground level,
just with an idea of how to go to that next level.

That is what I would like to see for all of our small businesses.

And I think, you know. Senator Cardin — I know that Senator
Cardin shares this.

And I know that here in this county and across our state we
have, you know, people out there who have some great ideas. And
they just need us to figure out ways to invest in those ideas, not
to do the work for them, as you indicated, but to provide the tools,
the mechanisms, the mentorship, Mr. Doss, that these businesses
need, the investment that they need, whether it is equity, capital
and venture funds, or it is an under $150,000 loan so that we can
grow them.

This is the tool for our new economy. Senator Cardin knows this.

We know that in a world that is becoming increasingly diverse —
and that is true for our state — that our job creation and our busi-
ness creation is going to take place with these entrepreneurs.

And so I just want to thank Senator Cardin and thank each of
you for being here today to help us figure out how we can
jumpstart some of those businesses.

Thank you. Senator Cardin.

Senator Cardin. Well, thank you very much. I really do appre-
ciate that.

And I appreciate each of your participations here today, and I
look forward to working with each of you as we try to sort out what
we can do a better job on, helping minority small businesses.

Mr. Doss pointed out this is the — access to capital is the critical
part of the equation; it is not the only part of the equation. We
have government procurement, which is clearly an area that we
have worked very, very hard on. We have technical assistance to

106

help, regulatory relief, the tax code. And we go and on and on, on
the different issues that affect small businesses and minority-
owned businesses.

So the issue, though, of capital is a critical issue because, as has
been pointed out by all of you, there have been extreme difficulties
of minority businesses to get access to equity capital, to get access
to capital during tough times, the options that they have that they
can exercise. All that makes it a real challenge.

And as a result, we have not reached anywhere near our poten-
tial in this country for minority opportunity, which is a key value
of our country, and we have denied our economy its full strength.
And for those reasons, we have to pay greater attention to it.

I am encouraged by the testimonies today, and I am encouraged
by the leadership at the SBA and Department of Commerce in pro-
viding where we can.

And in the private sector, Mr. Hairston, you were kind of modest
when you said that you are the largest lender for small businesses.
You are the dominant lender for small businesses in our State, and
we appreciate that very much.

We want to take your best — I know you would like competition.
So I know you want to get the other banks out there doing better;
I know.

Mr. Hairston. They are welcome.

Senator Cardin. Yes, I understand. But we would like to take
the best practices and share that so that we can get more activity
and get more opportunity for small businesses and minority busi-
nesses to be able to take advantage of the opportunities of this
country.

So this hearing was to explore ways that we can do that. I think
it has been extremely helpful, and we will be following up to figure
out how we can implement policies that can lead to the proper re-
sults for minority businesses in our community.

Thank you all.

With that, the hearing will stand adjourned.

[Applause.]

[Whereupon, at 11:20 a.m., the hearing was adjourned.]

Internet Archive Audio

Featured

Top

Images

Featured

Top

Software

Featured

Top

Texts

Featured

Top

Video

Featured

Top

Mobile Apps

Browser Extensions

Archive-It Subscription

Save Page Now

Full text of "MINORITY ACCESS TO CAPITAL"

See other formats